Rebooting growth without blowing the fisc

The Indian economy is slowing down. GDP growth is at its lowest in five years. Private investment, a critical element of growth, continues to be sluggish as corporates battle low capacity utilisation. To make matters worse, public consumption — be it purchase of two-wheelers, cars or demand for cement/steel — has declined. Farmers remain in distress. Banking industry woes refuse to go away and the challenges in the financial sector have been compounded by the crisis in the non-banking finance sector. The economy is in a crying need for a stimulus.

Fortunately for the Finance Minister (FM), monetary stimulus is already under way with the Reserve Bank of India cutting repo rate by 75 basis points (bps) this year and experts predict another 75 bps cut going forward. The question before her is whether to supplement the monetary stimulus with some fiscal support to power the economy to grow faster?

The government, over the last few years, has been trying to pump-prime the economy through a large dose of public investment. But that option, it appears, has run its course as the fiscal math is turning adverse. It barely managed to meet its 2018-19 fiscal deficit target of 3.4 per cent of the GDP. Since then the economy has headed south with revenue growth declining sharply. Not surprising that a chorus has risen asking the FM to throw fiscal prudence to the wind and support growth at all cost.

But government can catalyse economic growth without having to spend and risk losing credibility on its commitment to fiscal discipline.

Reduce corporate tax on future investments: Private sector investment in the economy is stubbornly low as India Inc is sitting on excess capacity. They need a push to start investing again and many agree that reduction in corporate tax could do the trick.

After all, India’s corporate tax rate, at 30 per cent (for companies with revenue above ₹250 crore), are on the higher side and the government is committed to reducing it. But such a move now will accentuate the revenue shortfall.

The FM can, however, offer lower tax rate for all large future investments. By doing so, there is no worry of any immediate revenue loss even as the animal spirits gets unleashed in the economy. Such a move, experts say, will also help India capture a share of capacity re-alignment that is likely on account of the US-China trade war.

Revive consumer confidence: Private consumption is on the decline as consumers both in urban and rural markets are not spending. The expectation is that the FM, to boost consumption, will offer tax breaks for urban consumers even as the PM-Kisan scheme leaves ₹87,000 crore in the hands of the farmers.

But any amount of sops is unlikely to work as consumer confidence is low. The RBI’s Consumer Confidence Index slipped to ‘pessimistic’ territory in May this year. “..the weakening confidence is primarily attributable to the deterioration in sentiments on the economic situation and employment,” the banking regulator said. The tone of the Budget can change this.

The FM should send a clear message that the government is taking all the right steps to revive the economy and provide enough confidence that the consumers’ future is secure. Only then will they spend.

Try out new ideas : Even though public spending has played a critical part in fuelling GDP growth in recent years, the government is running out of this option fiscally.

While it is established that quality public spending can trigger growth, any further government borrowing risks crowding out of the private sector from the debt market and raising the borrowing costs. If that happens it will negate the effect of the monetary stimulus (the interest rate cut).

It is time for the FM to try out new ideas and asset recycling is one such option. The government can sell its stake not just in PSUs but in assets such as roads, airports, ports, power infrastructure and use the money to create more infrastructure. This cycle can be repeated many times over.

According to experts, if assets worth one per cent of GDP is recycled, growth could rise by as much as one percentage point. Difficult times calls for bold measures.

Involve private sector in agriculture: The BJP, in its manifesto, has promised an investment of ₹25-lakh crore to boost productivity in the farm sector. This is required to double farm income and make India a $5 trillion economy. But the government alone cannot invest this sum. It has to tap the private sector which has both the money and technology.

The FM can make a beginning in this Budget by incentivising private sector investment into warehousing and storage facilities.

Other steps can follow after the high-powered committee set up to structurally reform the sector delivers its recommendations.

Tap tourism to create jobs: Tourism provides 10 per cent of world’s GDP and accounts for one in 11 jobs globally. It is a big job creator and one in five jobs created globally are attributed to travel and tourism. The Modi government, in its first stint, failed to give adequate emphasis to tourism as it did in attracting foreign investment. It is time to correct this.

A comprehensive tourism policy that rewards pro-active States, attracts large-scale private investment and creates a national skilling initiative will go a long way in leveraging India’s tourism potential and creating a lot of jobs, especially for women.

Give time for reforms to work: At times not doing much works. The government has pushed through a lot of reforms and policy measures during the latter part of its previous stint and it makes sense to give time for them to work. They include GST, Insolvency and Bankruptcy Code, opening up of FDI, Direct Benefits Transfer and Faster Adoption and Manufacture of (hybrid and) Electric Vehicles (FAME-2). It can, at best, improve these measures based on stakeholder feedback.

Will the FM adopt some of these measures? We will know in a few hours.

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