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The Reserve Bank of India (RBI) has warned that public finances have been stretched by the imperative to mitigate the impact of the pandemic, and headroom for continuing support to aggregate demand may be severely diminished.
In the case of state finances, space is likely to be squeezed so much that cuts in growth-giving capital expenditure seem quite probable, the central bank said in its latest annual report.
Relief to economy
The central bank acknowledged that government consumption spending has provided a measure of relief to the economy, with the Central government’s revenue expenditure, net of interest payments and major subsidies having risen by 33.7 per cent in the first quarter of the year.
The future path of fiscal policy is likely to be heavily conditioned by the large overhang of debt and contingent liabilities incurred during the pandemic, it added.
The RBI opined that: “A credible consolidation plan, specifying actionables for reduction of debt and deficit levels, will earn confidence and acceptability, rather than just extending the path of touch-down.
“As the wind down begins and consolidation resumes, it is prudent to expect lower contributions of GFCE (government final consumption expenditure) to overall demand.”
In order to boost fiscal revenues and mitigate the pains of this transition, the central bank recommended that big data and technology can be leveraged to track and identify tax defaulters, increase the tax payer base by tracking their income and wealth parameters, and by addressing the challenges confronting the GST (Goods and Services Tax) regime through rationalisation, simplification of returns and procedures, including automatic invoice matching, intelligence, enforcement, inspection and audit.
The central bank also said it is worthwhile to consider an evaluation of the experience with GST by an independent committee, which can draw on the lessons gained so far to recommend the way forward. It observed that fiscal incentives for industry can be realigned in favour of productive labour-intensive companies so as to generate employment.
Impediments to investments
The report underscored that declining capacity utilisation, the weakening of consumption demand, and the overhang of stressed balance sheets are restraining new investment.
The central bank assessed that corporate tax cut of September 2019 has been utilised in debt servicing, build-up of cash balances and other current assets rather than restarting the capex (capital expenditure) cycle. These underlying developments suggest that the appetite for investment is anaemic and in need of more reforms
The RBI is of the view that targeted public investment funded by monetisation of assets in steel, coal, power, land, railways and privatisation of major ports by Central and State governments under an ndependent regulator can be the way forward to revive and crowd in private investment.
“In fact, GST Council type of apex authorities can be set up in respect of land, labour and power to drive structural reforms. They could include speedier implementation of the national infrastructure pipeline, a north-south and east-west road corridor together with a high-speed rail project that build on the successes of the golden quadrilateral, alongside steps to improve business sentiment and the environment for investment,” the RBI suggested.
Further, States can be encouraged to publicise the availability of litigation-free land in their jurisdictions with access to modern infrastructure.
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