Many analysts believe that finance minister Arun Jaitley’s job of presenting the union budget has got a lot tougher after the Bharatiya Janata Party’s (BJP) rout in the recent elections to the Delhi assembly.
They say that he will find it difficult to stick to fiscal discipline and will have to resort to greater spending instead.
In fact, the recent elections—and the revised GDP figures for India—may have made Jaitley’s job easier. Greater public spending is what the Indian economy needs now. And the results of the Delhi elections as well as the new GDP figures might persuade Jaitley to shed his conservatism and do just that—spend more. (Jaitley himself has since asserted that he will stick to the fiscal path he has outlined but his party may want to think again.)
Let’s take up the revised GDP figures first.
India’s Central Statistical Organisation (CSO) recently put out a new set of numbers on India’s growth rates, which indicate that the country’s economy grew by 4.7% and 6.6% during 2012-13 and 2013-14 respectively, if we go by factor prices.
The previous growth rates (using factor prices) for 2012-13 and 2013-14 stood at 4.5% and 4.7% respectively.
The higher growth in 2013-14 is something of an optical illusion: the CSO depressed the growth rate for 2012-13 in the new base, which resulted in a higher growth in 2013-14.
At market prices, growth rate for 2013-14 turns out to be 6.9%. For 2014-15, the CSO projects a tigerish growth rate of 7.4% at market prices.
Ignore the deficit
The nuances to these estimates will be lost on investors and the electorate.
They will want Jaitley to improve on the earlier numbers if he wants to show that the incumbent National Democratic Alliance (NDA) government is doing a better job of managing the economy than the previous United Progressive Alliance.
That means Jaitley will have to produce a growth rate of at least 7.5% in the coming year. It’s hard to see how this can happen if he sticks to the path of fiscal discipline—that is, the target of a fiscal deficit of 4.1% of GDP for 2014-15 and, say, 3.6%for 2015-16.
Sticking to fiscal discipline will not just hurt growth in the short-term. It risks antagonising the electorate because it will mean cuts in subsidies, on spending on the social sector and, perhaps, even on the government’s flagship programme, MNREGA. It may also spell higher indirect taxes and no change in incentives for household savings. Not quite what voters are looking at the moment.
The CSO’s recent growth estimates for 2014-15 show that growth this year has been powered by private consumption and government spending (although there are questions about how government spending could have risen as much as the CSO estimates when the government has been trying to squeeze expenditure).
And the key driver of long-term growth—investment—is still not rising fast enough.
That’s because private investors are stuck with high levels of debt and can’t access loans from banks. There’s a problem with the supply of loans, too; public sector banks lack the capital needed to back loan growth.
Time to spend
Only the government opening up its coffers and spending can revive investment, especially in the troubled infrastructure sector where the public-private-partnership model that drove investment in the period between 2004 and 2009 is now broken.
The finance ministry’s mid-term review, published in December 2014, makes out a strong case for stepping up public investment in the present situation. It says that, “…consideration should be given to address the neglect of public investment inthe recent past and also review medium term fiscal policy to find the fiscal space for it.”
That translates into: don’t worry about the fiscal deficit for now, go out and put public money into irrigation, power, roads and the like.
Jaitley needs to listen to his economic advisors. He must step up public investment. He must also put more capital into public sector banks so that private investors can access funds. Rating agencies might baulk at the government’s straying from the fiscal deficit targets to which it has committed itself. The government must ignore them for now.
The NDA needs to sustain the growth momentum revealed in the most recent estimates if it wants to stay in the good books of the electorate—and that of investors as well.
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