Budget 2020: If government is serious about growth revival, it shouldn’t be too focused on fiscal deficit target

The economic growth is dragged by a poor show in the manufacturing sector, lower revenue collections hampering the ability of the government to ramp up spending and the absence of consumer demand in Asia’s third-largest economy.

Published: Jan 23, 2020
Budget 2020: If government is serious about growth revival, it shouldn’t be too focused on fiscal deficit target Image: Shutterstock

Union Budget 2020 is being unveiled in the backdrop of a severe growth slowdown in the Indian economy. The GDP growth for the fiscal year 2020 is estimated to fall to 5 percent, the lowest in 11 years. The economic growth is dragged by a poor show in the manufacturing sector, lower revenue collections hampering the ability of the government to ramp up spending and the absence of consumer demand in Asia's third-largest economy. Worsening global conditions add to the woes. There is a likelihood of economic growth falling further since government spending, which has been aiding growth in recent quarters is unlikely to continue in the last quarter on account of the government's tight financial position. It is in this backdrop that Union Finance Minister Nirmala Sitharaman will present her budget.

If one looks at data, growth in private consumption has fallen sharply over the last five quarters. In the second quarter, it grew by just 7.8 percent compared with 14.4 percent in the same quarter of the previous fiscal year. Compared with this, government consumption has stayed at nearly the same level 15-18 percent in the last twelve months. The high government spending was essentially supporting GDP growth. But, as mentioned above, it is doubtful if the government can maintain this momentum in the months ahead due to a revenue shortfall.

The primary challenge for the finance minister then is to convince investors that the government has a plan ready to tackle the nosediving economy. So far, the government has announced several baby steps, including the ambitious Rs 102 lakh crore investment plan for infrastructure sector. But, the markets are not convinced about the government managing the money to fund these projects. For instance, to reach the target of Rs 100 lakh crore investments in say five years, total investments need to be around Rs 20 lakh crore a year. How will this huge deficit be filled? So far, India has been spending an average Rs 8 lakh crore annually since FY13 on infrastructure.

According to the plan announced by Sitharaman, of the total investments, 39 percent each will come from the Central and state governments while the remaining 22 percent from the private sector. But this is easier said than done. Bringing the private sector on board will be difficult at this stage since investors are wary about the economic situation on the ground. The ongoing controversy in the country over CAA (Citizenship Citizenship (Amendment) Act 2019) has led to nationwide protests and made investors even more cautious. If one looks at the average infra funding pattern since FY13, the states have been the major contributors to projects with average annual spending of Rs 3.3 lakh crore while the Centre has been contributing only about Rs 2.38 lakh crore.

Now, we are talking about Rs 20 lakh crore a year. This means states will have to contribute more money, possibly over 40 percent to the total to meet the target. Unless there is a significant jump in revenues in the next few years enabling the government to reserve money for that kind of spending, this will be mere wishful thinking. The Goods and Services Tax (GST) revenues have fallen way below the target so far and several state governments are up in arms against the Centre for not delivering the promised compensation on revenue loss on account of the GST implementation.

The present economic scenario warrants nothing but a major stimulus package. The time for baby steps is over. But, as of now, given the kind of revenue shortfall and tight fiscal deficit target, the government is not in a position to mop up enough funds for a big package. Therein lies the key dilemma for the government. If Sitharaman is serious about getting growth back to the economy, she should let go of the obsession with fiscal deficit numbers and focus on reviving growth. The extra fiscal room the government will get can be used for ramping up investments in infrastructure projects, which will then generate jobs and demand in the economy.

Even more worrying is the fact that the nominal economic growth at 7.5 percent is expected to fall to a 42-year low. A freefall in economic growth should be the top priority of the government at this point. Fiscal deficit targets can wait.

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Original Source: https://www.firstpost.com/business/budget-2020-if-government-is-serious-about-growth-revival-it-shouldnt-be-too-focused-on-fiscal-deficit-target-7881561.html