When faced with a prolonged slowdown, a prescription of fiscal stimulus is normal. When the private sector is not forthcoming in terms of consumption and investment expenditure, the Government has to step up
Finance Minister Nirmala Sitharaman will present her second Union Budget today at a time when the Indian economy is grappling with the lowest growth in six and a half years, with the Gross Domestic Product (GDP) dipping to 4.5 per cent in the July-September quarter. Economists are now more or less in agreement that the current slowdown has cyclical as well as structural features.
Also, most economists believe that it is more of a demand side problem that needs to be tackled by providing more disposable incomes in the hands of the people. The fiscal space available to the Government to leverage the fiscal policy is limited owing to lower than expected tax revenues and the corporate tax cut announced in September 2019 that have constrained income.
The Government has already committed an economic stimulus through the National Infrastructure Pipeline (NIP), the proposed expenditure for which in the Financial Year 2021 (FY) is Rs 19.5 trillion. Providing such funds (the Centre and States are required to pitch in 39 per cent each) at a time when the resources of the Government have hit rock bottom is a challenge.
Taxes, which are a major source of Government revenue, have reached only 45.5 per cent of the FY 2020 Budget estimates as per the Controller General of Accounts.
Clearly, the tax collections have not matched the seven per cent growth of the economy in the first half of this fiscal. It is highly unlikely that the Government will be able to reach its target tax collection of Rs 24.61 trillion by the end of March 2020. Therefore, a larger fiscal hole is expected in this Budget. The higher oil prices amid US-Iran tensions have not helped ease the Government’s fiscal deficit worries.
When faced with a prolonged slowdown a prescription of fiscal stimulus is normal. When the private sector is not forthcoming in terms of consumption and investment expenditure, the Government has to step up. The Centre must stretch itself without worrying too much about missing the deficit target. When the fiscal stimulus shows its impact, the corporate earnings increase along with that of retail investors. Also, it directly impacts the jobs and incomes generated in the process.
The Reserve Bank of India (RBI) has done its bit by changing its stance on the monetary policy from “neutral” to “accommodative” and reducing the repo rate by 135 basis points in 2019. Thereafter, it adopted a wait-and-watch approach and kept the repo rate unchanged to a nine-year low of 5.15 per cent. This was necessitated by rising inflationary pressures in the economy. The RBI has revised its estimate of retail inflation for the second half to 5.1-4.7 per cent from 3.5-3.7 per cent. Under the given circumstances, when pursuing an expansionary monetary policy looks dangerous and the Government finds its hands tied for fiscal stimulus, the question arises what approach should be adopted that can be successful in bringing the economy back on track?
Here are some ways through which the Finance Minister can steer the economy on the path to recovery.
Boost demand: Economists agree that a slowdown in consumption through a lack of demand has been a major contributor in the current deceleration as consumption is the “engine” of the economy. Hence, the Finance Minister should ensure an increase in disposable income in the hands of people who have the high marginal propensity to consume and low marginal propensity to save. Schemes like the Kisan Samman Nidhi, increasing allocations under the Mahatma Gandhi National Rural Employment Guarantee Act, giving income tax relief to the lower middle class and even schemes having the character of the Universal Basic Income (UBI) like Universal Pension can go a long way in boosting demand, especially rural demand.
Allow States to borrow more: States can help the Central Government in providing a fiscal stimulus and distribution of resources. The Centre should in fact raise the borrowing limits of States so that more money flows into all regions, thereby boosting demand.
Fill Government posts: If the Centre and State Governments decide to fill vacant posts in their offices on a priority basis, it will not only create purchasing power but also give a fillip to the youth who are living through the worst employment crisis the country has seen in decades.
Private investment revival: Private investment has not picked up till now due to stress in the banking sector, especially in the non-bank financial company sector, a weakening demand and falling business sentiment. The early December quarter earnings indicate that the stimulus through rate cuts and lower corporate taxes has not been able to boost business growth. Net sales of many BSE-listed companies show a lower year on year growth of 4.07 per cent from 4.81 per cent in the preceding September quarter.
Faster revenue generation: The Government’s tax revenue for April-November 2019 was just Rs 11.7 trillion, just 0.8 per cent more than collected last year. Through disinvestment also, the Government generated revenue of Rs 18,099 crore, which is way below the target of Rs 1.05 trillion that it set for itself. In order to meet its expenditure, the Government will have to step up revenue generated through the disinvestment route while not giving any further rebates in income tax rates. A major relief in personal income tax rates may also not help in boosting consumption. Given the present circumstances of low business sentiment, uncertainty in the global business environment and deceleration in private investment — any increases in disposable income will not convert into spending entirely — it is likely that most of it will be saved for emergencies. Instead the Government should bring more of high income earners into the tax net.
Control wasteful expenditure for fiscal consolidation: During hard times, no one, including the Government can afford wastages and leakages. The Government needs to seriously plug in leakages from the system and plan its expenditure in a better way.
A cautious monetary policy: At present the RBI has to worry about infusing capital into banks that need it, ensure smooth mergers and takeovers and prevent any further bank frauds that have proven detrimental to the health of the banking sector in the past. Some relief announcements for the non-banking sector for purchase of bad assets should be there. The transmission of rates must be ensured and at a quicker pace, while further reductions can only be done if inflation allows that. Since the fears of “stagflation” gripping the Indian economy are already there, the RBI can do nothing more than just wait and watch.
(The writer is Professor and Head of Department of Management and Commerce at Trinity Institute of Professional Studies, GGSIPU, in Dwarka)