Left with little choice and headroom, the government may consider an Rs 50,000 crore stimulus to pump prime the economy.
It may be aimed to provide a boost for the slowdown-hit economy, particularly its worst performing key sectors like exports, infrastructure, manufacturing and MSMEs, where the deceleration has led to a 5.7 per cent growth in the Q1 and threatens to subvert any revival in Q2 as well.
Well aware that such a dole-out could throw away the fiscal deficit target of 3.2 per cent this year, the carefully crafted steps of a package is now a necessity with the finance ministry.
The new fiscal dispensation suggested by the NK Singh committee gives elbowroom to the government to pursue expansionist goals as long as additional expenditure is within a range of 0.5 per cent of GDP. This allows additional spending up to Rs 72,000 crore this fiscal.
Sources said that as part of new steps being looked at by the finance ministry, it could offer sops to the export sector, which has been hit hard by the rising rupee.
The blueprint for reinvigorating the export sector could also include giving exemption to exporters from payment of GST, but this has to be approved by the GST Council that is meeting next on October 6.
Exporters are facing problems on pending GST refunds, which is affecting their operations.
For the small and medium sector (MSME), the government dole could include relaxation of the working capital requirement to 180 days from the current 90 days and a new interest waiver scheme. This is expected to allow MSMEs more time to mobilise funds for operations and investments. The MSME sector is the main driver of India’s economy and also a job creation engine.
The stimulus would also include more funds for construction of roads and expansion of the railway network.
This, it is believed, would have the multiplier effect in generating jobs and boosting consumption.
Sources said that the process of strengthening the banking sector will be given a leg up with the infusion of up to Rs 10,000 crore more into recapitalising state-run banks, in addition to the Rs 15,000 crore already budgeted.
With credit growth slow and the banks reeling under pressure of mounting bad loans this step, the finance ministry thinks it could provide much-needed capital to continue lending.
Jaitley is expected to target additional government expenditure in areas that could push up both demand and consumption.
The existing weak spell in manufacturing and capital formation, pushing down growth to 6.5 per cent in H2 from 7.7 per cent in H1 of FY17, also aggravated demand. While this has all ingredients of blowing government expenditures out of proportion, finance ministry officials are however unfazed by the fiscal deficit breach threat. One of the officials involved in the process said there is no danger to the fiscal deficit.
“There is problem of private investment. The government is seized of the issue. Very soon you will hear from us. From day one, this is proactive government. We are analysing the economic indicators and appropriate action will be taken at the right time,” Jaitley said.
On the positive side, the government expects to match or better its performance on disinvestment this year where it is targeting Rs 72,500 crore earnings.
This would to some extent allow government to scale up spending without damaging the deficit situation much. Moreover, strategic sale and privatisation could allow some of the ailing PSUs to expand and diversify.
“In the last few years, market was quite volatile at times, so the government has to wait for the right time for the divestment,” Jaitley said, indicating the Centre’s intention to go for disinvestment with full force.