Surplus from the RBI would not be sufficient to increase the spending power of the government and to generate revenue, as that will only compensate for the shortfall in revenues.
Increasing government expenditure, especially capital expenditure, can steer the Indian economy out of the ongoing slowdown driven by a declining investment rate and declining demand, former RBI Governor C Rangarajan and EY India’s Chief Policy Advisor D K Srivastava wrote in The Indian Express. However, the surplus from the RBI would not be sufficient to increase the spending power of the government and to generate revenue, they added, as that will only compensate for the shortfall in revenues. Hence, larger disinvestment may help the government to generate revenue. Calling the demand-driven slowdown as cyclical, Rangarajan and Srivastava said that the countercyclical policy is primarily the responsibility of the Centre and it is time to look at structural reforms in the banking sector, governance in general and the fiscal reforms relating to direct taxes and GST.
C Rangarajan and D K Srivastava mentioned that GST has changed the structure of indirect taxes, affecting the balance between goods and services, formal and informal sectors, and central and state tax revenues compared to the pre-GST period. They added that since its implementation, the compliance cost has risen considerably for the assesses, particularly the small and medium enterprises.
Two major factors behind the slowdown
A combination of two major factors — a sharp weakening of demand in different sectors such as automobiles and housing, and the significant fall in the savings and investment rate — have been held responsible for the downturn of the Indian economy. C Rangarajan and D K Srivastava underlined that the persistent downward trend of the saving and investment rates has led to a fall in India’s potential growth rate to below 7 per cent and any additional fall below the potential growth rate may be due to cyclical factors.
Suggestions to the government
- C Rangarajan and D K Srivastava have suggested the centre to bring onboard state governments for increasing their capital expenditure relative to their respective gross state domestic products (GSDPs).
- They also highlighted that through PSUs, the Centre may invest an additional one percentage point of GDP compared to the present levels.
- Other suggestions included investments through the public-private partnership (PPP) model.
- It has been advised that private sector may be induced to supplement the government’s investment in select projects.
- They mentioned that the amended FRBM Act has a provision for increasing the fiscal deficit by 0.5 per cent of GDP under certain circumstances, which the government can make use of.