Economic stimulus: What is it, and how does it impact the economy?

Have you heard of the economic cycle? It is where the economy goes through different stages called expansion, peak, contraction and trough. While expansion and peak work positively for the economy, contraction and trough are negative. So, how does the economy sustain these two stages?

Here is where the government’s role is crucial. The government and regulatory bodies plan various strategic measures to help the economy manage downturns. One such measure is the economic stimulus. In today’s article, let’s understand what economic stimulus is and how it helps the economy.

What is economic stimulus?

Before the concept of economic stimulus, let us learn what stimulus means. A stimulus is something that triggers a reaction or an activity. For example, you take a tablet when you are unwell. The tablet reacts and cures your illness. So, the tablet is the stimulus, and your cure is the reaction.

The same concept is applicable in the case of economic stimulus, too. Economic stimulus is the process of the government undertaking specific measures to help the economy overcome its issues and change positively.

How does economic stimulus work?

The economy goes through periods of highs and lows. While the periods of high present an opportunity for further growth, the periods of low require measures for mere sustenance. In both these cases, the government plays a vital role in backing the economy.

For example, when the economy is booming, the government introduces various incentive-linked schemes and policies to improve investments in certain areas. Similarly, when the economy is falling, the government introduces different measures about tax policies, interest rates, etc., to help ease the situation. Such initiatives to handle specific economic issues are called the economic stimulus package.

Components of economic stimulus measures

The government’s economic stimulus compromises two aspects: Monetary and fiscal.

• Monetary policies

Monetary policies are usually formed and monitored by the economy’s central bank to control the money supply and promote economic growth. It is often used in times of inflation or deflation when the economy’s currency is unstable. Monetary policies are crucial as they directly impact the country’s GDP and exchange rate.

Banks modifying rates such as the statutory liquidity ratio, cash reserve ratio, repo rate, reverse repo rate, bank rate, etc., are examples of monetary policy measures.

• Fiscal policies

Another aspect of economic stimulus is fiscal policy measures. Fiscal policy is where the government introduces measures to impact its revenue and expenditure. It does so by introducing tax-related measures such as increasing or decreasing tax rates to adjust the revenue as required. Similarly, the government also revisits its expenditure plan to stay within the available revenue to limit the dependency on borrowings.

Fiscal policies, like monetary policies, aim to resolve economic issues like inflation, unemployment, economic growth, etc. 

Benefits and risks

Economic stimulus packages bring various benefits to the economy, such as stabilising the money supply, increasing employment opportunities, reducing the ill effects of recession, boosting investments, promoting overall economic growth and more.

However, extreme reliance on such economic stimulus packages can be harmful to the economy, too. When such measures focus on increasing the demand in the market but do not increase the supply accordingly, it again leads to inflation. These measures require the government to increase its spending and cut down tax rates to ease the burden of recession and other downturns on citizens. But, this can lead to the government increasing its borrowings, landing in a deficit.

Hence, the concept of economic stimulus is subject to mixed opinions and criticisms.

Economic stimulus in India

The government’s involvement in handling economic issues during COVID-19 is a classic example of the economic stimulus in India.

Like every other country, India was going through a tough time during the pandemic. The government introduced various measures as part of its economic stimulus package to help the country navigate the pandemic. Some of them are:

• Atmanirbhar Bharat Abhiyan: The Prime Minister in 2020 provided an economic stimulus package to promote a self-reliant country, and to revive and improve various industries affected by COVID. Increasing credit support, bringing in policy reforms and reducing entry barriers were some measures in this package.
• Monetary policy measures, such as interest rate cuts, increasing liquidity, and relaxing regulatory requirements for lending, were part of the economic stimulus package to stabilise the country’s money matters.
• The government also introduced programmes like the Pradhan Mantri Garib Kalyan Yojana (PMGKY) to help the poorer sections of society by giving them free food grains, cash, insurance and more.

Bottomline

Economic stimulus acts as a force to stimulate economic growth through measures implemented by the government. It includes various monetary and fiscal policies to handle the country’s money supply, improve economic downturns like inflation and recession, increase employment, control the government’s revenue and expenditure, etc.

While the objective of these stimulus packages is to benefit the economy and promote growth, they can sometimes cause more harm. Hence, careful consideration of the impact is essential before implementing such measures.

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