Modi’s economic review: Disinvestment gets leg-up, no cuts in expenditure

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New Delhi | Published: September 16, 2018 4:09:39 AM

Economists hail fiscal prudence, call for dynamic policy-making to address CAD, rupee worries.

The government is confident and will strictly maintain the 3.3% fiscal deficit target— Arun Jaitley, Finance minister (File photo: PTI)

After unveiling a clutch of steps on Friday to control the rising current account deficit (CAD) and spur capital inflows, the government on Saturday decided to keep the pace of budgetary expenditure, especially capex, to prop up economic growth. It also decided to be more aggressive on the disinvestment front and aim at surpassing the Rs 80,000-crore target for the fiscal year with renewed focus on strategic sales, though only a paltry sum has so far been collected.

Emerging from a meeting chaired by the Prime Minister to review the economy, finance minister Arun Jaitley reiterated the government’s commitment to meet this year’s fiscal deficit target of 3.3% of the gross domestic product (GDP), even as he pinned hopes on the overall tax collections “meeting or even surpassing” the target.

Given that Air India sale has been put on the backburner to garner funds “in excess of target from disinvestment,” the government will have to sell large portions of its “SUUTI stakes” in private firms, sell stakes of maharatna PSUs like ONGC and Coal India and prompt cash-rich PSUs to buy back their shares.

Referring to detailed presentations made by various departments of his ministry to the Prime Minister, who undertook a review of the economy for the second consecutive day, Jaitley said steps against black money like demonestiation and the GST have had salutary effect on the direct tax base, number of tax filers and advance tax receipts. According to an FE estimate, the number of income tax assessees (all categories including individuals and corporates) in FY18 could turn out to be 13.76 crore or thereabouts, up 66% over the previous year.

Though there is a shortfall in GST revenue (Central GST collections are roughly a quarter below the target), the minister said with consumption picking up and the multi-point tax value addition settling down, evasions would become more difficult and collections would improve.

Till August 31, 44% of the budgeted capital expenditure of Rs 3 lakh crore for FY19 has been achieved, the minister said, adding that the annual capex target would indeed be met. While the  reiteration reflected the importance being given by the government to public expenditure as a potential growth driver in the absence of a credible recovery, yet of private investments, analysts feel that unless at least the revenue expenditure is curbed to an extent, meeting the deficit target would be difficult.

Signs of a slowing of expenditure pace are already visible; the Centre’s total expenditure and revenue expenditure grew 8.7% and 6.6% in Q1FY19 versus 27.1% and 25.8% in the year-ago quarter. As FE has recently reported, the Centre has lined up plans to raise a massive Rs 1.7 lakh crore via the EBR route in the current fiscal, up 110% from FY18.

“On the basis of all this analysis, we are optimistic about our growth rate, tax collections and certainly as far as the fiscal deficit is concerned, we are confident that we will be able to strictly meet the target,” Jaitley said.

Although the Centre’s stress on fiscal consolidation would militate against interest rate spike and a further depreciation of  the rupee, analysts have said that with many states reneging on the promises of fiscal rectitude with largesse like farm loan waivers, the combined fiscal deficit of the Centre and states would still be quite large. The increased reliance on extra budget resources (EBR) to fund government programmes also raises doubts about the fiscal situation.

“We are confident that between direct and indirect tax collections, the government will comfortably meet the target if not surpass it,” the finance minister said.  “As far as non tax revenues are concerned, the entire programme of divestment and strategic sales this year was also considered. Just as we exceeded the target last year, we are confident of not only maintaining the disinvestment target this year, but may perhaps be in excess,” he added.

However, the economists’ response to the steps announced by the government to rein in the CAD and arrest the rupee’s fall have been mixed.  Identifying non-essential imports to curb them would be a tricky thing, some opined, while others criticised the fact that most of the measures to encourage capital inflows were aimed at short-term portfolio flows, which are volatile in nature. Also, it would take a while for the steps to have the intended impact, they noted.

“If external conditions don’t worsen, oil prices don’t go further up and inflation remains under control, then a free fall of the rupee might not occur and the steps being taken by the government might suffice for the moment. But there are issues like possible hike in interest rates by the Fed and the unfolding ramifications of the trade war. One has to promptly and adequately react to such eventualities. What is needed is no one-time solution but dynamic decision-making,”  R Gopalan, former secretary-economic affairs, told FE.

According to Madan Sabnavis, chief economist at CARE Ratings, “these measures will take time to work through, especially capital flows like external commercial borrowing, foreign portfolio investments and masala bonds”. According to Gopalan, though canalisation or even some tariff hikes could help curb certain imports in the short term,  administrative steps to boost domestic production of coal, gold, other metals, electronic goods, etc, would be the medium-term solution to the threat non-essential imports pose to trade deficit and CAD.

“FPIs have also been seeking a greater say in the market, so removing the 20% exposure limit of their corporate bond pofolio to a single group may help,” Karthik Srinivasan, group head (Financial Sector Ratings) at ICRA said, commenting on Friday’s moves by the government.

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