The media is full of speculation about what Mr Chidambaram will do on Budget day. Will he heed the quests for tax-cuts coming from corporates as well as individual tax-payers? Will he give a fiscal stimulus to industry to boost sectors that are suffering from various woes because of rupee appreciation and threats of US slowdown? Fiscal stimulus is in fashion, so are fiscal austerity and compliance with the Fiscal Responsibility and Budget Management (FRBM) targets. What will Mr Chidambaram do?

In this connection, it is worth noting that the guardian of global fiscal virtue, the Managing Director of the International Monetary Fund, Mr Dominique Strauss-Kahn, has called for a fiscal stimulus to help the global economy escape the threats of recession. It was, no doubt, a nuanced call for fall from virtue, limited to countries threatened by recession. But, coming as it does from the IMF, long known for bouts of advice on tightening of fiscal belts, especially to poor countries as also to the richest, the advice shows how serious the US financial crisis is.

Indeed, one commentator reflected that Mr Strauss-Kahn calling for a fiscal stimulus might appear like the Pope embracing Martin Luther’s teachings. But, perhaps, the founding father of the IMF — at least one of the putative parents — John Maynard Keynes of General Theory fame, would have endorsed what his brainchild, the IMF, had called for. After all, did he not famously say that when circumstances change, he changed his opinion? So, has the IMF changed its views. The fact that the IMF now echoes Keynesian values and advice is more to its credit rather than otherwise.

The fact, however, remains that talk of US recession may be somewhat exaggerated and a global fiscal stimulus may overdo the counter-balancing of the decline in the US. A thoughtful column on the matter by commentator Samuel Brittan in Financial Times of February 1, 2008, points out that there is virtue in diversity of financial national policy responses to economic crises.

The danger of a unified global financial policy response, as he says, would have been that everybody would have been right or wrong together, thus magnifying policy errors. The existing mixture of outcomes, while far from ideal, may be, he says, the best compromise available. His conclusion is that while we cannot avoid modest fluctuations, there is no need to talk ourselves into another Depression.

While expert opinions would appear to differ on the turnout of current events, the need for fiscal stimulus of some kind or the other seems to have been accepted, at least in the US. So far as the European Union is concerned, as Samuel Brittan says, it is hung up on sound finance. Mr Strauss-Kahn should know this because he had been Finance Minister of France before joining the IMF as its Managing Director.

Since the US cannot risk rushing into over-stimulus, which may lead to inflation, commentators have started saying that global fiscal stimulus should focus on the countries of Asia. The Financial Times had even written an editorial calling for expansionary policies in Asian economies to overcome the effects of a threatened recession in the US.

Whether China or India or Japan would be in a position to implement such expansionary economic policies depends on the political circumstances of each of those countries. Japan is just recovering from a phase of deflation and perhaps may undertake such a policy. China is too politically fragile to experiment with policies that can stoke inflation. We are concerned with Indian policy responses.

That said, there is still scope for a more relaxed Indian approach to fiscal correctness. Forget for the moment that the apostles from the IMF have spoken in favour of fiscal stimulus.

Our own circumstances may call for relaxation of fiscal standards in these circumstances. Let us take a look at some of these.

First and foremost, the impact of the rising rupee has been a setback to employment in various industries, such as garments, leather and auto ancillaries, affecting their export prospects. The Central and State Governments would be well-advised to steer their fiscal policies to give relief to these industries.

Maybe, fiscal purists may protest against such giveaways. But it is far better to give fiscal concessions now to take the burden off the shoulders of the exporters than to let the economy go into decline. This relief can come in the shape of sales tax concessions, excise duty reductions and interest subsidies. But the time has come to consider the situation holistically instead of swearing by the mantra of pursuing fiscal stability.

In the context of the US financial institutions breaking down, the debate on international economic policy has been revived. This primarily reflects serious meltdown in US financial institutions. The fiscal monetary interface has come up again for discussion. Depending on the US election results, one can be certain that the new US Administration would concentrate on revving up the US economic machine.

The question for India is how we are to fare in the process. Are we decoupled enough from the US economy sufficiently to withstand a slowdown in the US?

It behoves the Indian policy-makers to carefully consider such issues in connection with the Budget, and not push them under a carpet, repeatedly saying that we are fully insulated from the US slowdown.

I believe the Finance Ministry should be carefully considering tax and credit relief to industries that might be affected by a potential US slowdown. There is every justification for a national effort to stave off the effects of such a collapse, if it happens. Candidates for relief may range from our textiles and garments industries to automobiles. Not to ignore, however, is the pride of our economic success, in software industries. The Budget should treat these as an agenda for disaster relief. Even as we plan programmes for tsunami or flood or drought relief, we should plan for relieving disasters arising from the US slowdown.

An industry-wise and sector-wise dialogue would definitely help in sorting out options. The Centre should provide generous grants to States to come up with matching programmes. Far better is it to have a Budget that makes India’s economy proof against potential US recession before it unfolds than to regret the consequences after the event. The US Administration is now preparing fiscal action plans to meet the impact of a threatened recession. It is equally appropriate that countries like India should plan on actions to meet the impact of the US slowdown.

Fortunately, the tax outlook so far in India has been good. It gives sufficient headroom for the Finance Minister to take action in the form of reliefs. So too with State Governments. Let not the fiscal bogey prevent adequate responses to a threat to economic growth arising from global recession.

Mr Chidambaram and Dr Reddy should continue to implement a fiscal monetary stimulus to combat the effects of a serious slowdown in the developed economies of the world. The path of wisdom is to budget for these consequences. Now that the IMF Chief himself has called for relaxing the rules of fiscal behaviour in times of great stress such as the present, a fiscal stimulus to overcome the effects of an expected US recession is well within the rule-book of good governance in financial matters.

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