Signal that economy ideally placed for next set of reforms
Low inflation and muted inflationary expectations have presented the country with a “policy opportunity” for a further economic reforms, the government said on Monday, adding that despite a likely shortfall of 5% in the gross tax revenue, the glide path for budget deficit reduction, last revised in the February budget to create extra fiscal room for infrastructure investments, would be adhered to. And this, unlike in recent years,would not necessitate big spending cuts. Some expenditure management — as opposed to an “over-rationalisation” of spending — would suffice.
Speaking to the media, senior finance ministry officials said real GDP growth at market prices this year could exceed 7.5% (the Economic Survey last February put it at 8.1-8.5% and the Reserve Bank of India recently revised its forecast to 7.4% from 7.6%). With the reform agenda being pursued, the economy “would over time realise its 8%-plus growth potential”, they said in a statement. “With supportive policies in place, India is emerging as a strong growth driver for the world economy, capable of sustaining economic growth through its own momentum.”
Finance secretary Ratan P Watal iterated that the FY16 fiscal deficit target of 3.9% of GDP (the deficit in the previous year was contained at 4%, compared with the revised budget estimate of 4.1%) would be achieved, despite a 10-percentage-point increase in tax devolution to states and a 30% rise in Plan capital expenditure (up to August-end this fiscal, this spending of the most productive nature stood at Rs 52,612 crore, up 38% from the corresponding period a year ago). Watal claimed the quality of expenditure had improved thanks to restructuring of old schemes (the recast of central sector schemes would be carried on further in the run-up to the Budget FY17 for which preparations had begun earlier than usual) and subsidy reforms.
While savings are being made on major subsidies thanks to subdued global commodity prices and the diverse reforms, economic affairs secretary Shaktikanta Das said the interest subsidies being given to various eligible sectors like textiles had had a distorting effect on the interest rate market and needed to be replaced with other forms of support like viability gap funding and upfront capital support. This (removing interest subsidies) was also important to ensure better transmission of interest rate cuts by the Reserve Bank, he added.
A review of the small savings rate was under way, Das said, but added that the social security aspect of these schemes could not be ignored. Chief economic adviser Arvind Subramanian said that monetary policy transmission was also being achieved through other means like downward pressure on G-Sec yields from the increase in the FII/FPI investment limit in these instruments. The raising of the FPI/FII limit would ease the pressure on domestic liquidity and thereby accelerate the flow of bank credit to corporate India.
Amid reports that the Cabinet was about to consider a proposal for recast of loans amounting to Rs 4.3 lakh crore of nine state power distribution companies, Watal said the finance ministry was working with the ministry of power and states and any solution to the issue would require steadfast commitments by states to undertake “drastic reforms” in the sector, which has failed many bailout packages in the past. The 13th and 14th Finance Commissions had led to fiscal gains for states and the proposed solution to discoms’ problems would strike the right balance and ensure these gains aren’t squandered. Among the eight states reporting problems for the discoms, three or four were stressed the most and laden with 75% of the outstanding loans.
In its latest report on state finances, the RBI noted that despite the budgeted reduction in the gross fiscal deficit-GDP ratio in FY15, the debt-GDP ratio of states would marginally rise owing to the takeover of bonds issued by power discoms by eight states under the fiscal restructuring plan.
Subramanian said the tax revenue growth estimate this year (16.5%) was much more realistic than last year’s and this is one reason why the glide path for deficit targets could be maintained. As against the budget estimate of Rs 14.49 lakh crore, the tax collections could be around Rs 14 lakh crore, Watal said. According to the chief economic adviser, subdued oil prices had had the effect of tax cuts to consumers with 80% of price declines reaching them.
The officials also countered the criticism that despite the efforts to improve the ease of doing business, much had not changed on the ground. “There is indeed a lot of healthy competition among states (to make things easier for businesses). They are simplifying processes and a lot of impact is there in the field level,” Das said.
On the impact of a deficient monsoon on the farm sector and inflation, Das said the net area sown in this kharif season had been marginally higher than last year. The country also had enough food stocks at hand, he said. GDP grew a lower-than-expected 7% in the first quarter of the current fiscal compared with 7.5% in the previous quarter and 6.7% a year ago. Investment was aided by higher government spending with gross fixed capital formation growing 4.9% in the first quarter of 2015-16, compared with 4.1% in the previous quarter. The recent 0.5% rate cut by the RBI, which was mostly transmitted by the major banks like State Bank of India, is expected to push consumption in key sectors like realty, consumer goods and automobiles.