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Gross domestic product (GDP) growth in the past few quarters have come way lower than expectations. Although several high-frequency data had suggested a growth slowdown, the severity of it took everybody by surprise.
The Centre, however, remained somewhat oblivious to the situation initially. It finally woke up after the publication of the 1QFY20 GDP numbers and, has since then, announced a slew of measures to arrest the slowdown. These are welcome steps, but are likely to play out only in the medium to long term. The challenge at this juncture is to revive growth in the short term and prevent India from getting into an extended low-growth phase. The government’s expenditure did not witness much traction in 1QFY20 due to the elections, but picked up in 2QFY20. However, due to the likely slippages in tax and non-tax revenue, the Centre is expected to go for a substantial cut in the budgeted expenditure for FY20. Last month the finance ministry directed departments and ministries to cut expenditure by 3% to 8%. Even states are likely to do the same.
At a time when key growth drivers—private consumption, investment and net exports—are down and out, and growth is largely dependent on government expenditure, this is not good news. However, the Centre has very little choice if it was to stick to the fiscal deficit glide path. With the Union budget FY21 less than a month away, the question is what can the budget do to revive growth? A low-GDP growth means tax revenue will remain subdued and a constraining factor for stepping up expenditure.
This means the government must attempt to construct its FY21 budget in a graded fashion to ensure expenditure is rationalized and prioritized, and all avenues of revenue generation are tapped.
First, it must rejig its expenditure in such a way that allocations to heads that create direct employment and put more money in the pockets of the people at the bottom of the pyramid get priority. Since these people have negligible propensity to save and are likely to spend what they receive, it will support consumption demand. So, budgetary allocation to rural infrastructure, road construction, affordable housing and MGNREGA must go up. At the second level, allocation for non-merit subsidy and expenditure that is less critical for reviving growth must be rationalized and, if needed, be deferred. Third, the government, besides disinvestment proceeds, should aggressively attempt to: (i) monetize assets of select public sectors, such as roads constructed by the National Highways Authority of India on EPC mode and (ii) explore private sector participation in both passenger and freight movement of railways. Fourth, it should even think of invoking the escape clause as suggested by the FRBM Review Committee headed by N.K. Singh. This will allow it to increase the fiscal deficit target by 0.5 percentage points of GDP and will provide additional fiscal space of a little more than a trillion rupees. And finally, the government must attempt to recover the money stuck in tax disputes, which is estimated to be higher than the fiscal deficit. This money then can be used to undertake infrastructure development that is employment-intensive.
Sunil Kumar Sinha is director and principal economist with India Ratings and Research. Views expressed are personal.