Don’t sacrifice economic growth at the altar of fiscal consolidation, say top economists

With the economy seeing an “uneven recovery” from pandemic, the Central government would do well to calibrate the pace of fiscal consolidation and focus more on giving a further push to economic growth, say top economists.

There is need to push the needle on capital expenditure in next few years to further support economic growth and address the double whammy of reduced incomes and high inflation faced by most Indian households, they said at the ‘Countdown to Budget 2022’ organised by The Hindu BusinessLine in association with BoB Financial, the credit card arm of Bank of Baroda and Hitachi India. The theme for the pre-Budget event was ‘Accelerating India’s Economic Growth’.

“This year the government should be able to meet the fiscal deficit of 6.8 per cent. For next year, there are factors that suggest the pace of consolidation will be marginal as you still need to support growth as well. The government also wants to push capex,” said Sonal Varma, Managing Director & Chief Economist, Nomura Holdings.

There is a need to be “tactical and strategic” about re-prioritising spending, she said, adding that the government this fiscal may end up spending ₹1-lakh crore less than budgeted. “The administrative and execution capacity to spend on projects is also limited. We need to step up on this while reorienting our expenditure,” Varma said. Some of the strategies that was adopted in the last few years should be continued to create savings on the expenditure side — leverage technology to reduce leakages, greater use of DBT to expand and cover even more schemes. The government should also look at rationalisation and merger of schemes, she suggested.

Consumption recovery

She also cautioned that the consumption recovery that one sees may turn slower as the economy exits the pandemic. “There is a risk of disappointment on the consumption side, which I see as a challenge. We should look to restart domestic demand so that we have self-generating growth cycle that we can have going forward,” Varma added. NR Bhanumurthy, Vice-Chancellor B R Ambedkar Economics University, said he does not see fiscal consolidation and economic growth as differing objectives, but are rather synonymous. “These two are not competing but complementing interventions,” he said.  Bhanumurthy said that he would expect the Finance Minister to continue with the fiscal policy stance adopted last year. He said that Budget should focus on bringing down the public debt to GDP ratio from current level of 90 per cent to 70 per cent over the next few years, as suggested by the Fifteenth Finance Commission.

GST compensation

On GST compensation, to States, Bhanumurthy expressed hope this will continue for some more time. “States need to have much more handholding. This is needed especially given the instability of revenues faced by them. They need predictable resources so they can better plan for the next year,” he added.

Stating that Indian economy was barely coming out of pandemic, Ajit Ranade, President and Chief Economist, Aditya Birla Group, said that he sees the fiscal deficit situation continue to be at the current level (about 6-7 per cent) and highlighted the pressure on the government to undertake both capital and welfare expenditure in the wake of pandemic. “It may take us one or two years to get out of the post pandemic stress. We may have to live with 5 or 6 per cent fiscal deficits,” he said. Ranade said India’s corporate tax rate is at a competitive range and there is no reason to go below this level. “I don’t think in corporate tax rate there is room to reduce. On individual income taxes, there can be some tinkering in exemption limits. But we have to be cognizant of the fact that India’s tax to GDP ratio is still low. We also don’t have much room to decrease individual income taxes,” Ranade said.

Current headwinds

Asked about the three current headwinds of US Fed tightening, global crude oil prices ( which has hit seven year high) and geo political flashpoints situation, Ranade said that the current global situation is somewhat favourable given that global growth and export prospects are positive for India.

“This time there won’t be taper tantrum. Oil will continue to be volatile. When oil prices go up, our import bill goes up, there is inflationary pressure, subsidy burden is going up. Our current account situation is much better partly because of capital account flows are strong and going to be stronger next year. We can sustain and perhaps survive oil price remaining in mid eighties. So long as they don’t touch hundred we are okay,” he said. Ranade noted that it is not that important as to whether Indian economy was staging a ‘V shaped’ or a ‘K shaped’ economic recovery. “There is no doubt that growth has increased. The question is whether it has benefitted all sections of society or not. In that sense, the benefit of this high growth are uneven. Large corporates have done well. Labour force participation has not improved. The economic growth is back and is good. But we have to ensure its benefits are evenly spread,” he added.

The pre-Budget session was moderated by The Hindu BusinessLine’s Senior Deputy Editor Shishir Kumar Sinha.

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