Pandemic Stimulus Backfired

India can be thankful it did not go bigger on government spending

- Ruchir Sharma

From the start of the pandemic, many emerging nations watched the US and other large developed countries “go big” on economic stimulus, and wished they could afford to follow. It turns out they were lucky if they couldn’t and wise if they chose not to. India was a bit of both: Restrained by lack of funds, it chose not to go too big.

Emerging markets which stimulated most aggressively got no payoff in a faster recovery, owing in part to the downsides of overindulging. India was not among the biggest spenders, which tended to suffer higher inflation, higher interest rates and currency depreciation, at least partly cancelling out the sugar high of stimulus.

Scanning data on the top emerging and developed markets for a statistical link between the scale of their 2020 stimulus programmes and the strength of the ensuing recovery, I found none. Even after correcting for the deeper downturns, which often produce a higher bounce-back in growth, aggressive monetary and fiscal stimulus added nothing discernible to the recovery.

This disconnect was particularly sharp in the emerging world. Dividing top emerging markets into heavy and light spenders, and including both new government spending and central bank asset purchases, the bigger spenders actually tended to suffer weaker recoveries. Through the second quarter this year, the median recovery in the 11 biggest spenders amounted to 12% of GDP, compared with 19% in the 11 lightest spenders.