The Budget’s onus to signal new beginnings

The backdrop against which Finance Minister Nirmala Sitharaman is preparing to present her first budget on July 5 is of a slowing economy. In the three years from 2016-17 to 2018-19, GDP growth was 8.2 per cent, 7.2 per cent and 6.8 per cent. In the four quarters from April-June 2018 to January-March 2019, GDP growth slowed thus: 8.0 per cent, 7.0 per cent, 6.6 per cent and 5.8 per cent.

This means that in the course of four quarters, GDP growth slowed by 2.2 percentage points, a significant loss of economic momentum.

The default response of most finance ministers – barring rare notable exceptions – to a growth slowdown is to pump-prime the economy by loosening the central government’s purse strings and asking the Reserve Bank of India (RBI) for a monetary stimulus of interest rate cuts.

Popular with finance ministers of the pre-1991 era, this approach, that pays little attention to the nature of a slowdown or its specific causes, has made a big comeback in recent years. Finance ministers Pranab Mukherjee and Piyush Goyal stand out, in particular, for their attempts to substitute increased government spending-led populism for reforms.

This time too, the budget preparations in North Block were marked by replay of the same old dilemma: Whether or not a fiscal stimulus should be administered to the economy.

Many economists and bureaucrats lobbied the finance minister for increased government spending and cuts in tax rates for rekindling consumption growth and pushing the Reserve Bank of India (RBI) for deeper rate cuts to revive investments (the central bank has already delivered three consecutive cuts of 25 basis points each in the repo rate during this calendar year, but with very little transmission of those cuts into banks’ lending rates, and consequently, hardly any impact on investments).

Those arguing in favour of a stimulus essentially want a continuation of the populism seen in the first Modi government’s economic policy approach that peaked with the Interim Budget’s roll out of a Rs- 6000-a-year income supplement scheme for small land-owing farmers – expanded since to the landless – and income tax breaks for the middle class.

This line of thinking seeks to bridge the India-Bharat divide with the promise of public provision of toilets, tapped water, cooking gas, loans and targeted cash payments.

A tight fiscal position, though, constraints further expansion of government spending. Government finances have deteriorated sharply. Controller General of Accounts (CGA) figures show that direct tax collections in 2018-19 fell short of the Interim Budget’s revised estimates by Rs. 74,774 crore and indirect tax collections by Rs. 93,198 crore. The shortfall in the central government’s net tax revenues, thus, adds up to 0.9% of the GDP.

The government managed to keep its fiscal deficit for the year under the budget target of 3.4% of GDP by cutting expenditures and shifting the deficit to public sector entities. The Food Corporation of India (FCI) took a substantial part of the food subsidy burden away from the Budget. The government delayed release of its reimbursements for the food subsidy, forcing it to increase its dependence on borrowings. The FCI’s borrowings from the National Small Savings Fund (NSSF) climbed from ₹700 billion, as on end-March 2017 to ₹1.86 trillion as on end-March 2019.

Similarly, public sector enterprise ONGC’s cash reserves eroded 98 per cent from Rs. 2,385.98 crore as on March-end 2018 to Rs. 167.42 crore as on end-September 2018. The company’s financials were hit as it was made to acquire another government-owned company Hindustan Petroleum Corporation Ltd (HPCL) for Rs. 36,915 crore, as part of the government's quest to raise revenues.

The economists that cautioned the finance minister against a fiscal stimulus are worried that next North Block could raid the RBI’s contingency reserves accumulated over decades to raise the money needed for financing sops and giveaways. Many of these economists are pointing out that there are the limits to which the government’s fiscal position can be stretched when the economy is not responding adequately to increased spending, and tax collections are falling short.

In truth, the unfolding economic slowdown is not an outcome of a shock. No spike in international crude prices or a sudden worsening of the balance of payments has triggered it. It is an outcome of policy failures and neglect of reforms alongside during the terms of successive governments. The consequence of the incompleteness of reforms is that today none of the main sectors in the economy, agriculture, manufacturing or services, is able to perform the role of a growth driver and jobs creator. The structural bottlenecks in the economy have deepened.

In effect, despite the many successes and considerable progress, the promise India made to itself in 1991 of evolving a new economic growth model stands broken. The old economic model is no longer delivering growth.

In these circumstances, a spending-led populist agenda – whether in form of a food security law or public provision of cooking gas and toilets – cannot step in for a fledgling economic growth model.

In the pre-budget consultations Sitharaman held, many of even those economists who are pro-Modi cautioned that the growth rate could slip below 6.5 per cent and remain stuck at that level for the next couple of years unless some harsh steps are taken.

A qualified economist, serial glass-ceiling shatterer and a communication specialist, the finance minister is ideally placed to nudge her party and the prime minister to revisit the basic tenets of their economic policy approach.

Will the 2019 Budget be the first step towards restructuring the economy and building a new growth model?

(Puja Mehra is a Delhi-based journalist. Her first book, The Lost Decade (2008-18): How India's Growth Story Devolved Into Growth Without a Story, has been published by Penguin Random House)

The views expressed above are the author’s own. They do not necessarily reflect the views of DH.