The extra-budgetary funding of the FY20 budget—via the PSUs—is around Rs 6 lakh crore, an amount that is just slightly lower than the central fiscal deficit of Rs 7 lakh crore.
Most of the criticism of the CSO raising its estimates of GDP just the day before the Interim Budget, not surprisingly, was about the possibility that this was done to give the government more room to show a lower deficit number. This, however, didn’t happen since, while the FY18 nominal GDP was raised to Rs 171 lakh crore from Rs 168 lakh crore earlier, the government retained the same advance estimate for FY19 GDP that was made in the first week of January; had it raised the GDP estimate for FY19, it would have been able to accommodate a higher fiscal deficit since the level is calculated as a proportion of GDP. Of course, it can still do this later and then show that the fiscal slippage was not as large as was earlier made out.
There are, however, several mysteries that arise from these—and earlier—GDP revisions such as the ones made while calculating the GDP back-series. If GDP during the NDA years is averaging around 7.7% over the last five years, why does it continue to need the kind of pump-priming that is being seen? Indeed, the 3.4% of GDP fiscal deficit number is not really what you need to look at, it is the combined public sector deficit—the Centre, the states and the PSUs—that matters. The extra-budgetary funding of the FY20 budget—via the PSUs—is around Rs 6 lakh crore, an amount that is just slightly lower than the central fiscal deficit of Rs 7 lakh crore. Add to this, the state government deficit and, according to a JPMorgan Chase research note, the total public sector borrowing was around 8.5% of GDP in both FY18 and FY19. If this is the kind of pump-priming required now, how much will it be when GDP really collapses?
The other mystery revolves around the relative efficiency in the use of capital. During the UPA-2 years, bank credit grew by around 16.3% on average every year and investment levels—as measured by Gross Fixed Capital Formation—were around 33.2% of GDP; the average GDP growth during this period was 6.7%. During the last five years, however, credit growth has around halved to 8.6% while investment levels have fallen to 29%. So, if a lower investment level and a much lower credit—partly due to the reduction in inflation, it is true—is yielding a higher GDP growth, this means the levels of productivity in the economy are up sharply. Is the GDP data incorrect, as many non-government economists suggest, or is it time to rewrite the investment-GDP playbook for the country?