The ‘Mid-Year Economic Analysis 2014-15’ tabled in
the Parliament by the Finance Ministry reveals that the aggregate revenue has
been growing at about 10 percentage points below the budgeted projections. It
otherwise means that there is a likelihood of shortage of over Rs. 1 lakh crore
in the revenue from the projections made in the budget. It means containing the
fiscal deficit at the targeted level of 4.1% for FY 2015 is beyond the reach of
the Finance Ministry.
But the review said: “The Government is committed
to meeting the fiscal target for FY 2015….” It therefore compels one to fear
that expenditure
cuts are in the offing, for reasons galore: One, however aggressive the
government might be to disinvest its stake in the PSUs, it may not succeed in today’s
not-so-encouraging global financial environment. Indeed that’s what had
happened when it earlier tried to disinvest ONGC and SAIL: but for LIC chipping
in, it would have simply failed. Two, the
economic growth for the current financial year has been pegged by the report at
around 5.5% of GDP, which is no better than what has been achieved in the first
half of the year. Three, although there appear some signs of private
consumption stirring up, the report indicates that private investment is still
to pick up.
Over it, the challenges for economic growth, according to the economic adviser, are essentially from within the country, the most important among them being the experience of the last
few years of over-exuberant investment, especially in infrastructure and in the
form of public-private partnerships that today stand broken. The reasons for
their failure are pretty obvious: delays in land acquisition and environmental
clearances, variability of input supplies, etc. Thus, there are today “stalled projects to the
tune of Rs 18 lakh crore, about 13% of GDP.” Over it, the over-indebtedness of
the Indian corporate sector with median debt-equity ratios at 70% is
incidentally said
to be the highest in the world. This fact has indeed created ripples in
the banking sector, for the restructured debts constitute around 11-12% of their total
assets. Bitten by this risk, banks, the report says, are obviously not so
enthusiastic in funding fresh projects from the real sector. The analysis also
felt that projects such as roads, public irrigation and basic connectivity
might no longer entice the private sector to embrace, for the lessons from the
PPP experience from the past indicate that given India's weak institutions,
there are serious costs that the private sector which is taking up project
implementation risks has to bear. That being the growth prospects, it is
anybody’s guess how ambitious it is for the Finance Ministry to contain the
fiscal deficit within the targeted 4.1%, unless, it goes for drastic cut in the
planned expenditure in the remaining months of the fiscal 2015.
Against this reality, Dr. Subramanian, the Chief Economic Adviser said:
“I think we will have to re-evaluate the fiscal
strategies generally.” He indeed went a step further when he advised the
government to consider a case not just for a counter-cyclical but a
counter-structural fiscal policy, motivated by reviving medium-term investment
and growth. He also said “that public investment itself could be an engine of
growth going forward.”
Now the question is: Is all this not a bundle of
contradictions? If Dr. Subramanian’s counter-cyclical approach is adopted to
kick-start growth, obviously, government has to give a go by to the fiscal
prudence. Implicitly, Dr. Subramanian is also suggesting RBI to cut down
interest rates. Of course, there is another economist, Dr. Arvind Panagariya,
who too suggested for expansionary fiscal policy to ignite growth—let the
fiscal deficit be around 4.5% of GDP. Industry
too is clamoring for policy interest rate cuts by RBI to stimulate growth.
That
said, we need to examine if India can take the risk of public spending to
stimulate economic growth at the cost of rising fiscal deficit in today’s
global financial climate. Oil prices are falling, and dollar is
strengthening. Rubble had crashed from
45 to over 70 /dollar within weeks. It of course didn’t affect India yet
because, inflation is falling down and our foreign exchange reserves are
comfortable. But this may not hold good for long, particularly, if the government
resorts to public spending on infrastructure.
Such a
move would spread wrong signals among the global investors. Fearing India has
lost fiscal control they may flee—pull out billions of dollars. And as the oil and
other commodities prices fall and dollar strengthen against all currencies,
deflation is likely to spread worldwide. Cumulatively, these global
developments are certain to put rupee on a sliding spree. Once that happens, RBI
is sure to step in and initiate measures that would run counter to what Dr.
Subramanian recommended. Over it the falling oil prices are sure to hit Indian
corporates, for the markets have become highly vulnerable to contagion risk. It
means Indian companies will face further stress in demand for their goods
leading to their defaults even.
It’s a pretty
awkward situation—if fiscal deficit commitments are to be met, expenditure must
be curtailed; if growth is to be stimulated public expenditure must sharply be
increased. Finding a sensible balance is the real challenge to the Finance
Minister and his economic adviser, which they have to address with deftness
while presenting the 2015-16 budget.
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