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Last Updated : Jan 09, 2020 04:42 PM IST | Source:

Budget 2020: If govt is serious about reviving growth, it shouldn’t be too focused on fiscal deficit target

Weakness in the manufacturing sector, poor tax collections and an unprecedented lull in consumer demand have been a drag on the economy. Government’s policy flip-flops in some key sectors and worsening global conditions have made the situation worse

Union Budget 2020 is being unveiled in the backdrop of a severe slowdown in the Indian economy. GDP growth for FY20 is estimated to fall to 5 percent, the lowest in 11 years.

Weakness in the manufacturing sector, poor tax collections and an unprecedented lull in consumer demand have been a drag on the economy, Asia’s third largest. The government’s policy flip-flops in some key sectors and worsening global conditions have made the situation worse.

Most likely, the slowdown could persist for a while as the government may cut back on spending because of its tight financial position. It is in this context that Finance Minister Nirmala Sitharaman is preparing her Budget speech. The finance minister, surely, has an unenviable job.

Who will put money on the table?

If one looks at the data, growth in private consumption has fallen sharply over the last five quarters. In the second quarter, it grew by just 7.8 percent compared with 14.4 percent in the comparable quarter of last fiscal. Compared with this, government consumption has stayed at nearly similar levels of 15-18 percent in the last 12 months. The high government spending was essentially supporting GDP growth. But, as mentioned above, it is doubtful if the government can keep up this momentum in the months ahead due to the revenue shortfall.

The primary challenge for the finance minister, thus, is to convince investors that government has a plan ready to tackle a nosediving economy. So far, the government has announced several measures, including the ambitious Rs 102 lakh crore investment plan for the infrastructure sector. But markets are not convinced on how the government will manage to fund these projects. The government needs to walk the talk.

The infra conundrum

For instance, to reach the Rs 102 lakh crore investment target in, say, five years, the total investments need to be around Rs 20 lakh crore a year. So far, India has been spending an average Rs 8 lakh crore annually since FY13 on infrastructure. So, how will this huge deficit be filled?

Sitharaman’s plan is that of the total investments, 39 percent each should come from the central and state governments, while the remaining 22 percent from the private sector. But this method is easier said than done. Bringing private sector on board will be difficult at this stage since investors are wary about the economic situation on the ground. The ongoing citizenship law controversy and nationwide protests have made investors even more cautious.

If one looks at the average infrastructure spending pattern since FY13, states have been the major contributors to infrastructure projects, with average annual spending of Rs 3.3 lakh crore, while the Centre has been contributing only about Rs 2.38 lakh crore.

Now, we are talking about Rs 20 lakh crore a year. This means states will have to contribute more money, possibly over 40 percent to the total to meet the target. Unless there is a significant revenue jump in the next few years, enabling the government to reserve money for that kind of spending, this will be mere wishful thinking.

Goods & Services Tax (GST) revenues have fallen way below the target so far and several state governments are up in arms against the Centre for not delivering the promised compensation due to revenue loss on account of the GST implementation.

The present economic scenario warrants nothing but a mammoth stimulus package to revive animal spirits in the economy. Make no mistake, the time for baby steps is over. But, as of now, given the kind of revenue shortfall and tight fiscal deficit target, the government is not in a position to mop up enough funds for a big package. There lies the key dilemma for the government.

Forget the fiscal deficit number for now. It will be asking too much of the finance minister to deliver on both growth and fiscal discipline. The nominal economic growth at 7.5 percent is expected to fall to a 42-year low. That should be a clear warning sign for policy makers.

Given the state of the economy, growth should be the priority even if it means sacrificing the fiscal deficit target in the short term. The extra fiscal room the government will get can be used to ramp up investments in the infrastructure projects, which will then generate jobs and demand in the economy. An obsession with the fiscal target could prove counterproductive.

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First Published on Jan 9, 2020 02:50 pm
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