Budget must focus on stepping up savings

As the government gets ready to present the Union Budget, slowing economic growth, a failing financial sector and overhang of corporate debt are overwhelming concerns.

While Budgets routinely review the fiscal aspects, providing a snapshot of the hits and misses of the Indian economy (see Table) will be in order as these will have a bearing on the growth strategy. The question is whether the Budget can bridge the misses and consolidate on the hits, overcoming its financial constraints.

The onus lies with the government to step up the economy. The overall scenario is not inspiring. To begin with, the Centre’s tax receipts have not been robust, but the demand from States for their share keeps rising. Also, continuing with the spate of social programmes launched in recent years seems imperative. The divestment of public sector entities faces uncertainties, while the budgetary support required for ailing industries and state-owned financial institutions remains sizeable. Credit flow is subdued and it may be far-fetched to pin hopes on FDI to come to the rescue.

In the banking space, public sector entities face operational constraints in getting into long-term finance whereas the private sector is mostly averse to it. This leaves a huge vacuum in the institutional framework for long term and reliable finance. Retail debt and fixed income markets with greater rural and semi-urban reach is another aspect that needs attention. In the last three decades, India has tried different models of engagement such as PPPs and JVs but very few were successful.

Leaving the growth agenda solely to private capital could be detrimental. The last 30 years of reforms show that public capital markets have barely been able to raise the required funds for growth, nor have debt markets penetrated across the corporate and retail segments. FDI is tapering and FII flows have been volatile.

Enough incentives to step up savings are not in evidence, while consumption avenues keep increasing. During the early period of economic take off in 1960-69, Gross Domestic Savings as per cent of GDP in India was a meagre 8.1 per cent compared to 18 per cent in developing Asia, 26 per cent in East Asia and 16 per cent in South East Asia. Though India grew up to 31.5 per cent by 2010-18, still it lags behind the 41 per cent in developing Asia, 45 per cent in East Asia, 34 per cent in South East Asia. This anomaly surely has a telling effect on the growth in per capita GDP, which remained a measly 3.3 per cent average for India during the period 1960-2018, compared to 6.5 per cent in East Asia and 6.8 per cent in China.

Other options are problematic. Quick-fix solutions such as loosening the fiscal grip and resorting to helicopter money are unlikely to work; it has failed to make any impact in Japan, which has been in recession for two decades. And Europe that sees limited leeway in hasn’t been able to revive rejuvenate its economy despite resorting to negative interest rates.

The central bank is reaching the limits of its capacity to stimulate the economy, even after transferring dividends. The effect of tax reliefs is also contestable. In the recent past, only the US has been able to gain from tax reliefs as the capital parked outside the country to save taxes returned in a big way.

The message for the government is simple. Make savings available for productive purposes through an efficient institutional framework, continue with social interventions, and energise local businesses with better access to finance. For the economy to get closer to the $5 trillion goal, the government will have to do the heavy lifting.

The writer runs the consulting firm ‘Growth Markets Advisory Services’

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