Even if finance minister Arun Jaitley has made up his mind to pump the economy with a clutch of measures, he enjoys very little head room for additional spend of about $7.7 billion or Rs 50,000 crore that’s reportedly the size of the stimulus package. Limitations in manoeuvrability is also due to the risks in derailing the fiscal consolidation that’s been achieved thus far the hard way with fiscal deficit at 3.5 per cent, current account deficit (CAD) at 1.5 per cent and a negligible revenue deficit.
There’s no reason why any government worth its salt would opt for run away spending in the hope of perking up demand for goods and services, more jobs and manufacturing across industrial sectors that have proved elusive till now. The economic stimulus package was designed and implemented in 2008-09 by then finance minister Pranab Mukherjee in the backdrop of global meltdown. Adverse economic conditions globally had a ripple effect on Indian growth parameters at that point of time to warrant a stimulus. Today, there’s no justification or rationale for a fiscal stimulus package, given that the external markets have been benign and just because Indian companies have not been able to exploit the opportunities available internationally.
In fact, the recent economic outlook of OECD had pointed to enhanced growth at 3.5 per cent in 2017 and 3.7 per cent in 2018. Cracks appearing in the economy are not due to lack of external demand, but mostly attributable to internal disruptions owing to demonetising high value currency notes, closely followed by the goods and services tax. This is coupled with disinterest shown by Indian companies to make investments or plough a chunk of their profits into new ventures. Till now, only public spending has pulled the economy along to post 5.7 per cent growth in the April-June 2017 quarter. Controller General of Accounts (CGA) data for this period also testifies to the fact that the government continued to spend big time till June end this financial year, given that 80.8 per cent of fiscal deficit set at Rs 550,000 crore for the entire financial year was crossed in the first three months.
If one were to go by finance ministry officials, this spend thrift policy continued in July and August this year leaving very little flexibility for the finance minister to put more at stake in the next six months. What could create some space is in overhauling government expenses and 10 per cent cut in revenue spending that does not in anyway contribute to creation of capital assets. Since revenue collections are moderate, Jaitley has very little scope for providing tax concessions unlike Pranab Mukherjee, who cut service tax and customs duty rates by two per cent across the board in 2008-09. Instead, Jaitley should carry on with reforms, advance disinvestments in state-run blue-chip companies and in banks. Current buoyancy in equity markets could be leveraged to create more fiscal space to manage macro-numbers better.
Huge liquidity in banks and pile up of cash with companies should in fact provide solace. Instilling confidence in banks to push up credit growth and companies to make investments should be done. There’s still some headroom to perk up the export of goods and services in the next six months through a package of concessions to not only reduce trade deficit, but also keep CAD under check. Perhaps, some action is needed to beef up large social sector projects like affordable housing and infrastructure ventures. Despondency and desperation cannot become premises to kick up growth numbers. Quality of growth that’s inclusive and job oriented is what needs to be planned ahead.