GDP growth may not be higher in a business-as-usual scenario

Published: June 4, 2019 2:20:41 AM

Central government expenditure in FY20 is expected to be constrained by limited resources, since tax collections are expected to grow only modestly; the shortfall in tax collections in FY19 was `1.68 lakh crore

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It is not surprising GDP grew at just 6.8% in FY19. The poor corporate results in the first two quarters had made it amply clear that the economy was in trouble, with the clinching evidence coming during the festive season—one of the dullest ever.

Even as the government continued to spend, private consumption was slowing, as the high frequency data showed. Private consumption in the March quarter decelerated to 7.2% year-on-year (y-o-y), the slowest in four quarters, and, together with a sharp moderation in gross fixed capital formation to just 3.6% y-o-y, dragged down the GDP for Q4 FY19 to an embarrassing 5.8% y-o-y.

Looking ahead, there are couple of reasons why the growth momentum will stay lethargic for another six months. First, private sector investments are unlikely to pick up until there are clear signs that demand will revive and until credit becomes a lot more affordable. Right now, real interest rates are still very high and corporate cash flows aren’t big enough to fund new ventures. Again, demand won’t rebound meaningfully until many more new and well-paying jobs are created and until incomes rise fast enough for consumers to be able to spend more. Apart from the government sector, it is not clear where exactly the job opportunities are going to be—other than a few spaces such as IT, e-commerce and financial services.

Therefore, it is hard to see demand rebounding simply on the back of more liquidity and lower interest rates; disposable incomes need to grow, too. Government expenditure in FY19, at `21.35 lakh crore, was up 13.2%, but, as a share of GDP, rose just 20 basis points. So, unless there is a much bigger jump in spends, the economy can get only a limited push.

Central government expenditure in FY20 is expected to be constrained by limited resources, since tax collections are expected to grow only modestly; the shortfall in tax collections in FY19 was `1.68 lakh crore. To be sure, the government will resort to extra-budgetary resources to meet expenses and this will no doubt boost employment and incomes.

However, it is possible this could crowd out private sector investments unless the resources are not mopped up from the bond markets but raised from elsewhere, such as from the sale of public sector companies. Given how the growth engine is sputtering, the government must resort to both stake sales and outright sales of PSUs and also monetise as many projects as it can.

At the same time, it must streamline and simplify the personal income tax structure so as to minimise the leakage. It must also come up with ways to rejuvenate real estate, undoubtedly the biggest catalyst for the economy. By current indications, however, a 7% GDP growth in FY20 is a tall ask, despite the low base of 6.8%.

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