In the run-up to the general Budget, the question on everyone’s mind is: “Will Finance Minister Arun Jaitley stick to the fiscal consolidation plan or loosen the purse strings to boost growth?” According to the Government’s fiscal consolidation plan, the fiscal deficit must be brought down to 3.9 per cent of the GDP this fiscal and to 3.5 per cent in 2016-17.
Though the government has been gushing about India being a haven of stability in an economically turbulent world, there may be compelling reasons for Jaitley to go for higher spending, given the anaemic recovery the economy is witnessing. Factory output contracted by 1.3 per cent in December 2015, shrinking for the second consecutive month (it was -3.4 per cent in November 2015) and exports fell for the 14th consecutive month in January 2016.
The first suggestion of deferring the fiscal consolidation plan by a year came from none other than the government’s top economist Arvind Subramanian in the Mid-Term Review in December. Though the Finance Ministry had then reaffirmed that it was sticking with fiscal prudence, there are now hints of a rethink.
The growth-deficit balance
A couple of days ago, Economic Affairs Secretary Shaktikanta Das had said that the government must walk the tightrope between boosting growth and keeping the deficit in check. A day earlier, Finance Secretary Ratan Watal dropped a subtle hint that the quality of government’s expenditure had been “very good” and that “capital expenditure had risen significantly vis-à-vis revenue expenditure”.
The ratings agencies and investment banks have been unanimous in warning the government against straying from the fiscal consolidation path. HSBC and Nomura, to name just two of them, have said that giving priority to growth over fiscal consolidation would be “counter-productive”. In fact, Moody’s on Tuesday said that even if Jaitley stuck to the fiscal consolidation plan, India’s fiscal metrics look vulnerable compared with its peers.
In contrast, the industry lobbies — CII and Ficci — have, not surprisingly, called for a boost in spending, especially in infrastructure, to spur private investment.
Farm focus
But the Finance Minister may spring a surprise by announcing a big package for the farm sector. And this would be in the fitness of things, given the rural distress and drought suffered over the last two years because of below-average rainfall. Though there are predictions of a good monsoon this year, it is imperative to boost public investments in agriculture, especially irrigation, and pep up rural demand.
Interestingly, in a Twitter survey conducted last week by the Finance Ministry, 55 per cent had said that the Budget must focus on agriculture.
Also, RBI Governor Raghuram Rajan is unlikely to oblige with a rate cut any time soon, given that retail inflation has edged up to 5.7 per cent. And, given the perilous state of the PSU banks’ balance sheets, they are in no position to lend to the risky infrastructure sector. So, any initiative to rev up the economy has to come from fiscal policy.
In 2009, Pranab Mukherjee, the then Finance Minster, had injected a massive dose of stimulus to boost the economy reeling from the after-effects of the Lehman crash. And it was this stimulus that helped India post growth rates of 8.5 per cent in 2009-10 and 8.9 per cent in 2010-11. The flip side of this, however, was that the country had to endure double-digit inflation for the next few years.
So, will Jaitley do a Pranab and inject a massive dose of stimulus to the economy next Monday? We’ll have to wait and see.