Getting past fiscal constraints to boost growth will be critical

Radhika Merwin | Updated on: Jul 05, 2019
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Apart from reviving investments, the Centre must push for structural reforms

The economy’s growth numbers have been under focus time and again — mostly over their credibility and how they are often at odds with other leading indicators of industrial activity. A recent paper by Arvind Subramanian,former Chief Economic Adviser, had also raked up the issue of computation of GDP — suggesting significant overestimation of growth numbers.

If one were to put aside the debate over the correctness of the GDP figures for a minute — though true estimation of GDP and its growth rate are extremely important — the more critical issue of putting the economy back on an accelerated growth path, would loom large on the horizon. Following its resounding victory in the Lok Sabha elections, the BJP-led government has set a grand target of a $5-trillion economy by 2024. Given that the size of the economy is about $2.75 trillion (GDP in nominal terms in 2018-19), achieving such a feat would imply an annual growth of 12-odd per cent for the next five years.

Tall task

Under UPA II (FY09-FY14), nominal GDP grew at a CAGR of 15 per cent. Under the NDA government (FY14-FY19) nominal GDP growth averaged about 11 per cent (CAGR) despite demonetisation and GST-related disruptions. Hence on the face of it, achieving a 12 per cent growth over the next five years may not seem entirely unmanageable.

But here’s the chink. The growth in the economy has plummeted sharply in the March quarter — real GDP growth hitting a 20-quarter low. Given that government spending has taken a big hit in FY19 and the Centre has limited fiscal space, fuelling growth will be a daunting task. Apart from reviving investments, the Centre will have to tackle supply-side issues and push forth structural reforms, if it wants to achieve sustainable growth. Remember, the much-revered growth numbers under the UPA regime was marked by high inflation and elevated fiscal deficits — one that is hardly desirable.

Above all, inflation and the rupee remain the jokers in the pack. Adverse swings can hurt growth and topple the Centre’s ambitious target.

Heavy lifting

GDP growth fell sharply in the March quarter of FY19 to 5.8 per cent (in real terms), led by slowdown across agriculture (negative growth), manufacturing, construction and trade. Of particular worry is the steep fall in growth of gross fixed capital formation to 3.6 per cent in the March quarter. With consumption remaining weak, and sluggishness in private investment activity, GDP growth could well dip lower in FY20, from the 6.8 per cent level in FY19.




Significant improvement in government spending could have a multiplier impact and propel growth. But the Centre’s limited fiscal space is a cause for worry. A ₹1.45 lakh crore compression in expenditure in FY19 (from the budgeted) — owing to ₹1.67 lakh crore shortfall in tax revenues — had helped the Centre meet its magic 3.4 per cent fiscal deficit target.

For FY20, the Centre has pegged a growth of 20 per cent in expenditure (over CGA’s provisional estimates), which may seem tidy. But given that expenditure has grown by just 8 per cent annually over the past five years, the Centre’s projection for FY20 — based on revised estimates rather than CGA’s figures — appears a tall ask.

What is additionally worrying is the increasing reliance of the Centre on off-balance sheet borrowing — Internal and Extra Budgetary Resources (IEBR) — in recent years to fund its capital expenditure. In FY20, while gross budgetary support for capital expenditure is ₹3.38 lakh crore, the IEBR is a far higher ₹4.4 lakh crore!

Aside from understating the fiscal deficit, off-balance sheet borrowing is also an expensive way to mobilise resources.

Rising state deficits

Interestingly, in the March quarter — looking at expenditures of GDP — the government spending had shot up. But this was at odds with the significant reduction in expenditure by the Centre in the January-March quarter (as per CGA figures). The answer to the riddle possibly lies in the increased spending by the States. While the Centre’s gross borrowings fell marginally in FY19, the States’ borrowings shot up 14 per cent. Rising State deficit can have an inflationary impact and keep borrowing costs high, weighing on growth.

Published on July 05, 2019

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