The Economic Survey acknowledged economic slowdown impacting revenue collections for the government while there has been rising expenditure on farm sector.
By Ranen Banerjee
The Economic Survey has pegged growth at 7% for FY20. To be able to get the momentum up from last quarter’s growth of 5.8% to the stated target will call for a huge boost in government spending. We can expect higher allocations in the Budget for capital spending as well as social spending to boost jobs and demand. There can be a short-term realignment of the fiscal consolidation map with the deficit targets being marginally raised from 3.4% in FY19.
The Survey hints at a need for investment pump-priming of the economy to take it to the virtuous cycle of growth and employment. If the aim is to be a $5-trillion economy by 2025, the Survey points out India needs to grow at 8%. Given the headwinds to exports in the near term, the only way to boost growth will be to boost domestic demand. While the Survey expects private sector investments to see an upswing from here on, the government has to kick-start the process with higher spends. This approach would have inflationary risks, but given that inflation has been under control, calculated risks need to be taken. Deficit numbers are also watched by sovereign rating agencies. But given the track record of India and past ratings not getting influenced solely by fiscal prudence displayed by the government, the risks of a sovereign rating downgrade owing to 10 or 20 basis point higher deficits looks remote.
The Survey mentions the dependency of the projected growth rate on how the monsoons pan out. As an economy, we need to reduce our dependence on the monsoon. There is a need for more investments in irrigation infrastructure. We hope the Budget will consider schemes for more focus on small and medium irrigation infrastructure, and also extension and completion of canal works by states.
The Survey highlights the spillover risk of the stress in shadow banking sector. This has stressed the MSME segment that generates high employment and contributes significantly to GDP. Access to credit for MSMEs is critical and we may find the UK Sinha Committee recommendations in the Budget.
The Survey acknowledged economic slowdown impacting revenue collections for the government while there has been rising expenditure on farm sector. It is unlikely this trend will be reversed in the immediate term, and this is an area the Budget will have to balance, as also better targeting of subsidies so that leakages are eliminated, leading to savings. More direct benefit transfers in lieu of subsidies is likely to be a theme in the Budget.
The CAD is above 2.2% of GDP. The Survey notes that lower global growth and increased uncertainty over trade tension will likely continue to be the headwinds on exports. While majority of our export bill is on crude, we can hope crude prices don’t go up, else the CAD could worsen—anything beyond 2.5% on this front will be worrisome. We can expect focus on smoothening of the export process and investments in port infrastructure towards facilitation of exports.
The Survey also noted the need for reforms in lower judiciary as one of the areas of focus to further improve ease of doing business. Also, possible relaxation of some further FDI regulations could see higher FDI to pay for the CAD.
The Survey makes an important point on behavioural nudges on the revenue front towards higher tax compliance and improving revenue performance.
There are some bold ideas, and we now await the presentation of the Budget to see how many of the recommendations towards making India fit for the future have been considered by the finance minister in her maiden Budget.