27 जनवरी 2020
With growth at an 11-year low, all eyes are on the Budget to kick start the economy. What can the FM do? Let us evaluate the reasons for the current slowdown and then look at options to revive growth.
Growth has slowed down from 6.8% in FY19 to 5% in FY20 as per CSO (IMF: 4.8%). Both real consumption and investment growth has decelerated. For instance, private consumption is estimated to increase by only 5.8% in FY20 as against 8.1% in FY19. Investment demand has slowed down even more sharply to 1% compared with 10% increase seen in FY19. Domestic private sector capex remains weak. However, government reforms seem to be bearing result as FDI inflows into India rose by 16% in 2019 (source: UNCTAD).
The slowdown has had an impact on revenue collections and government’s ability to spend. As against the Budget Estimate (BE) of 11.1% increase in Centre’s tax revenue, actual collections are likely to increase by 3.9%. Out of this, a third of the gap is attributable to reduction in corporate tax cut announced in Sep’19. The remaining slippage is on account of economic slowdown Needless to say, this will have a commensurate impact on spending. Instead of 13.4% increase in expenditure as projected in Budget, the overall increase will be far lower at 9.1%.
For achieving a higher increase in spending than revenue, the fiscal deficit will have to expand to ₹7.28 tn (13% higher than FY19) or 3.6% of GDP as against BE of 3.3% of GDP. Notably, as much as 0.1% increase in deficit is on account of lower than estimated nominal GDP growth. Government is likely to tap in small savings and short-term borrowings to meet the gap between revenue and expenditure.
Given the economic backdrop, FM can kick start the economy by expanding fiscal deficit. The argument being that public capex will crowd-in private sector capex. Notably, general government spending has been increasing at 12% CAGR over FY14-18. This has been supported by investment spending by Central Public Sector Enterprises (CPSEs) including Railways and NHAI. Their combined spending in FY20 is estimated to be ₹5.4tn out of which ₹2.77tn is to be financed through bonds/loans (1.4% of GDP). Compared to this, household investment in real estate has increased at 4.6% and private corporate capex at 10.5%.
Higher fiscal deficit implies higher government borrowing. This year alone (Apr-Dec) state government borrowings have increased by more than 30%. India’s share of general government debt at 69% compared with EM average of 55% implies a quarter of Centre’s revenues are used to make interest payments. Large issuances by government imply higher nominal and real interest rates which crimps investment spending.
However, there is another way to ensure that government and private investment move hand-in-hand. The government can look at monetising its existing assets. Apart from CPSEs, the government has a large pool of land and buildings. The proceeds from monetisation of existing assets can be used for infrastructure investments. The government already has a well-defined infra pipeline of ₹102tn over the next five years. This will also usher in private sector capex with adequate focus on Public Private Partnership. Notably, Indian corporate sector has deleveraged over the last few years and new corporate tax rate should encourage investments. Indian PSBs are in a position to lend again after recapitalisation. Hence, rather than relying on deficit expansion, asset monetisation and reinvestment can kick start a virtuous cycle of growth.
Apart from this, the Budget should look at increasing real estate demand, which has been muted by providing incentive for purchase of a house. This will help in clearing unsold housing inventory and spur a real estate investment cycle, which means more demand for cement, steel and unskilled labour. For funding stuck real estate projects a beginning has been made by launch of an AIF of 250bn.
As investment activity picks up, consumption will also revive. The drop in consumption is also due to lack of credit availability with NBFCs and HFCs. The partial credit guarantee scheme launched last year to provide liquidity to NBFCs can be extended.
To summarise, the current economic backdrop is an opportunity to reboot the economy and engage private sector for sustained economic revival. This will allow us to invest in infrastructure while maintaining the fiscal glide path of 3.3% in FY21 and 3% in FY22.
The author is Chief Economist, Bank of Baroda.