India’s latest real GDP growth number of 7.6 per cent in 2015-16 provides an indication of the dilemma in union finance minister Arun Jaitley’s mind ahead of the forthcoming budget for 2016-17: fiscal consolidation or growth. India is now statistically one of the fastest growing economies when chilly recessionary winds blow through the global economy. If all is considered hunky dory on growth, he would aim for fiscal consolidation to set the nation’s finances in order. If not, the finance minister would try to provide a budgetary kick-start for infrastructural investments to boost growth.
Which strategy would he follow? The RBI governor has indicated his preference for fiscal consolidation. Some economists also believe that if the fiscal deficit – another word for market borrowings – target has been set at 3.9 per cent of GDP for 2015-16, this should be adhered to. So, too, must the target for 3.5 per cent of GDP in 2016-17. The concern is that this is the last budget for the finance minister to take tough decisions and implement reform. From next year on, he would be more worried about getting the government re-elected at the national level and increase spending.
There are 55 per cent people who live off land but distress in the sector has impacted their livelihoods. Agriculture must therefore be strengthened. Employment must be generated. For such reasons, the NDA government has become a great votary of the Mahatma Gandhi National Rural Employment Guarantee Scheme after threatening to bury it. It is a certainty that in the budget the outlays for rural employment schemes will be hiked.
Sticking to the fiscal deficit target caps the NDA government’s resort to market borrowings. If the government cannot meet routine housekeeping expenditures with its tax revenues, it will perforce borrow. This results in higher interest rates or government bond yields. Costlier capital is not what the doctor prescribes for the economy to stimulate more private investments. Having broken its promise in 2015-16, it is felt that the NDA government must get back to the fiscal deficit reduction path. This would also keep government’s debt to GDP levels within acceptable limits.
The royal road to obviate borrowings is to ensure that current tax revenues meet current revenue expenditures to eliminate the revenue deficit. But this is easier said than done. As much as two-thirds of non-plan revenue expenditures cannot be reduced as they meet interest payments, wage and salary bill of the government and subsidies. Unless these expenditures are reined in, it is impossible to reduce, if not eliminate, the revenue deficit altogether. This only means more borrowings or a higher fiscal deficit. For such reasons, it is felt that Mr Jaitley must tackle India’s fiscal challenges decisively.
But this is also the best time to budget for faster growth. Why should the government curb spending when private investments are in a pause mode and global markets are in a free-fall? Besides adverse global cues, the local stock markets have tanked of late because of worries over health of the nation’s public sector banks and their distressed assets. Three of them have slipped into the red. There has also been a huge write-off of bad loans. It is well known that non-performing loans to large industry rather than SMEs is the proximate cause of the banking sector’s woes.
As if all of this weren’t bad enough, nominal GDP growth at market prices at 8.6 per cent in 2015-16 is lower than what was budgeted for. Tax revenues will be less buoyant at a time of higher spending commitments towards one-rank-one-pension and the seventh pay commission award. For such reasons, the finance minister realistically cannot meet the fiscal deficit reduction targets in 2015-16 or 2016-17, for that matter. Should he then walk the talk on being fiscally correct? Will a slippage in the deficit target really matter when there are concerns over the state of the economy?
Besides industry, the finance minister also is worried about the state of Indian agriculture after two back-to-back drought years. There are 55 per cent people who live off land but distress in the sector has impacted their livelihoods. Agriculture must therefore be strengthened. Employment must be generated. For such reasons, the NDA government has become a great votary of the Mahatma Gandhi National Rural Employment Guarantee Scheme after threatening to bury it. It is a certainty that in the budget the outlays for rural employment schemes will be hiked.
Industry and agriculture will be addressed also through higher infrastructure spending. Despite indications of a global slowdown, the finance minister has appealed to foreign investors to become partners in the India infrastructure story. Unless he can raise budgetary resources, this is likely to be his strategy: Depend on FDI or public-private partnerships. But will it work? The US Ambassador to India’s candid comments at a Federation of Indian Export Organisation function should make one pause: a mere “invitation to invest” is not enough to enthuse American investors to come to India.
What foreign (and domestic investors) want is easier conditions for doing business. Greater tax certainty also matters. So would greater sanctity of contracts. “If (US investors) they are looking at other parts of Asia, they might look at Singapore, Vietnam, Thailand and normally in India also they are looking at different States, so it is an exceptionally competitive market and the invitation is not sufficient”, he added. The message is clear. Unless ground realities for doing business improve, potential foreign investors like the Americans have other options to pursue, especially in the ASEAN.
The finance minister, for his part, cannot pursue both options — fiscal consolidation and boost growth — at the same time. In the snow-bound resort of Davos-Klosters in January, he indicated that the current rate of 7-7.5 per cent is not India’s real potential; that there is potential to add 1-1.5 per cent. There is headspace that still exists. He sounded confident that the economy can grow faster. One way that can happen is through reform like passing and implementing the Goods and Services Tax. Towards this end, India Inc must do its bit by investing. It is cautiously optimistic about the bullish growth number but knows that reforms have been held up by politics. All eyes thus will be on what sort of budget Mr Jaitley will deliver when the global economic outlook and investor sentiment or the animal spirits of entrepreneurs is unfavourable.
(N Chandra Mohan is an economic and business commentator based in New Delhi)
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