The Union Finance Minister Nirmala Sitharaman will be undergoing immense strain while finalising the Budget to be presented on February 1. Four major factors – falling GDP growth, weak demand, mounting inflation, and fiscal deficit overrun will be crying for attention; each ahead of the other.
Starting with low GDP growth, it becomes pertinent to mention that growth of eight infrastructural sectors (core sectors) shrank continuously from August to November 2019. Some silver lining is exhibited by the recently released data on index of industrial production owing to the improvement in the manufacturing sector. Yet this illusionary growth hinges upon weak base owing to the contraction in manufacturing in November 2018 and is not enough to overrun the incessant disparagement. Infusion of Rs. 70000 crore in the public sector banks in August, decrease in repo rate by 135 basis points, stimulus to the corporate sector to the extent of Rs. 1.45 lakh crore and a Rs. 25000 crore relief for the real estate sector in November may turn out to be the growth accelerators rather than growth initiators.
Recently, the Reserve Bank of India, rating agency Moody’s and the World Bank have all decreased their growth forecasts for FY20 because of weak consumption, particularly at bottom of the pyramid. A number of factors, ranging from rural distress (due to demonetisation, non-remunerative prices of crops, high costs of insecticides, pesticides, cattle feeds and electricity), high GST on key inputs like cement, low credit off take and massive unemployment in addition to job loss have led to this weakening of consumption. Advanced estimates by NSO reveal that decrease in private final consumption expenditure has forced excess industrial capacity in the system which has prohibited the investors from making new investment, despite government efforts and accordingly the share of investment in GDP (28.1%) today stands lowest since 2002-03.
In terms of inflation, Sitharaman will be caught between the dichotomy of manufactured goods and food articles prices. Where inflation in context of manufactured products remained -0.25% in December 2019, inflation for the food articles riding on the back of vegetables (onion, potatoes, ginger) increased to 13.24%. Now, US-Iran tensions may give an external shock to the already domestically bleeding economy. Further, tension in Gulf region may exercise its own impact in several ways. India will have to purchase crude oil at higher prices and the payment will have to be made in dollars as against the favourable payment in rupees to Iran. It will weaken our foreign exchange reserves and ensure a rise in current account deficit and also result in depreciation of the rupee.
Few economists advocate that a depreciated rupee fortifies the chances of exports, but when protectionist policies are being exercised, this argument loses steam. Further, remittances to India on account of low exports to Iran and by the Indians working there will also decrease. Also, if the oil companies shift the burden of increased oil prices to the consumers, then cost of production will increase thereby adding to the existing inflation.
On the fiscal deficit part too, the problems are monstrous. The government has recently unveiled Rs. 102 trillion infrastructure plans for the next five years to be carried out jointly by the centre, states and private players. The initiative aims at making India a $5 trillion economy by 2024-25, hoping that the exchange rate will be between Rs. 71 and Rs. 73 and the nominal growth rate will be at 12.2% for every year from now. However, it seems to be an uphill task particularly when growth rate is accounted for - even if we assume that exchange rate does not depreciate much. Further, the document holding this investment plan states that nearly Rs. 42.7 trillion worth of projects are under implementation which means that the effective new investment will be around Rs. 51.3 trillion and the central government’s share each year will stand at Rs. 26500 crore. The FM may feel cash strapped here as estimates suggest that the government’s gross tax revenue receipts may fall short by over Rs. 2 lakh crore and disinvestment proceeds by Rs. 1 lakh crore which will be in addition to the fiscal deficit that has already surpassed the annual target in the first seven months of this financial year. Problems regarding fiscal deficit are likely to compound further when the states will be given their pending GST compensation.
Under these circumstances, it won’t be an easy sailing for the FM. The government should take appropriate steps to revive demand in the market as the efforts taken from the supply side may need some more time to yield results. An extraordinary attempt of collecting interim dividend from the RBI to the extent of Rs. 350-450 billion should be used to boost demand in the market. For this, the government should increasingly allocate additional sums towards MNREGA, PM-KISAN and rural infrastructural projects where the money can easily reach vulnerable sections of the society who will be instrumental in pushing up the demand cycle. Extending direct tax sops to the individuals may not be a conducive proposition as it will only help six crore individuals who may further use it for saving purposes. In order to help them, the government should cultivate tax saving options and the amount so collected through them, should be further channelised towards the bottom of the pyramid. Lastly, the government should concentrate upon completing the existing projects in hand instead of initiating new projects as the gestation period of new projects is large. Only serious and thoroughly planned allocations can help to bring the economy out of its present financial mess.
— Dr. Rajiv Khoshla is Associate Professor in DAV
Institute of Management, Chandigarh