China is going to spend 71,40,000 Crores to stimulate its economy!

The Government in People's Republic of China has decided to spend 850 Billion US Dollars from its kitty to stimulate its own economy.

In terms of Indian Rupees, that works out to 71,40,000 Crores.

In contrast, the total reserve of foreign exchange in India is just 700 Billion US Dollar.

This is being done to give a push to the domestic economy that has been lagging.

Suddenly, a huge demand is going to emerge as people at large are given money.

Whenever people get money, they do either of the two, spend or save. When they spend, they create demand for goods and services and this increases the GDP of the country. 

If they save, then the money sits in the banking sector and is available for lending to those who can productively use money to set up enterprises and grow the economy by providing more goods and services and jobs.

The basic difference between what has been happening in India and China is that the Chinese Government has decided to pump the money into the bottom of the pyramid, from where it will travel upwards to those who produce goods and services.

In India, the government has been giving reckless reliefs and concessions to the rich class with the result that the economy is deprived of wide scale purchasing power. The rich are just 10% and out of that too, the wealth is concentrated in the hands of top 1%.

Even if this 1% was to spend, they would not be able to have a wide impact on the economy. Secondly, they don't spend on mass produced goods and services, they are spending only on luxury and third is that it is their money they are spending thus the decision to spend or not spend lies with them. 

The stimulus in China is going to increase consumption at a wide level.

That is why, in expectation of a booming market and its consequent effect on the stock exchanges, investors have started to divest in countries like India and have started moving their money to China.

The Foreign Financial Institutions (FII's) have been selling equity holdings in India and taking their money to China.

The question is, will India too go for a financial stimulus?

Chances are dim.