Budget And Moral Imperatives

Increasing public investment and employment remains a moral imperative for finance minister Arun Jaitley

Union finance minister Arun Jaitley is probably caught in a cleft stick. With demonetisation throwing a spanner in the works, his fourth budget will understandably try to achieve a balance between reviving economic growth and maintaining fiscal stability. These are two seemingly conflicting goals, with economists sharply split on both sides of the divide. The fiscal responsibility and budget management committee is also believed to have drawn some red lines. But Jaitley may not have much of a choice.

There are two ways to revive growth: either through consumption or through investment. Export-led growth could have been another possibility but India’s persisting trade deficit and the world economy’s delayed recovery makes it a non-starter. With demonetisation squeezing out demand, there could be attempts to stimulate consumption through some restructuring in direct taxes and some realignment of indirect tax rates (especially excise) on goods, in line with the proposed goods and services tax slabs. The clamour for fiscal rectitude, especially the threat perception posed by credit rating agencies, might stay Jaitley’s hand from over-stretching.

The other alternative is government’s capital expenditure, because demand compression is also likely to suck out the private sector’s desire to invest. However, there are valid concerns over the government’s ability to execute projects efficiently and within budgeted costs. Road minister Nitin Gadkari’s recent admission of highway construction falling short of desired targets reflects both private sector lassitude in taking up infrastructure projects and the government’s less-than-stellar record in project execution.

File photo of finance minister Arun Jaitley; photo courtesy: Reuters

At a pre-budget seminar in Mumbai, former Reserve Bank of India governor C. Rangarajan said public investment amounts to roughly 7% of gross domestic product (GDP), with the Centre and the states (collectively) accounting for 1.6% of GDP each and public sector units contributing the balance 3.8%. If quality of execution is a concern, there’s a proposal to re-route part of the Centre’s public investment to public-sector units (PSUs) as equity which, leveraged with bank loans, can be used for greater impact. It’s not the best, or ideal, solution, but it sounds workable.

A section of economists and demonetisation supporters claim that penal taxes collected through the two-tranche income-disclosure scheme are likely to provide Jaitley with elbow room to stretch his capex budget without upsetting fiscal targets. And though that is serendipitous (Rs15,000 crore is expected from just the first tranche), the question arises whether Jaitley would allocate a higher capex outlay even in its absence.

Interestingly, increased capital expenditure meets three objectives simultaneously: reviving economic growth, visible progress towards meeting the UN’s Sustainable Development Goals (SDGs) and implementing some of the campaign promises made by Prime Minister Narendra Modi during the 2014 general election.

India is a signatory to the UN’s SDGs, which succeeded the Millennium Development Goals. The SDGs cover 17 broad goals (incorporating 169 related targets) to be achieved by 2030. The SDGs have been framed with the singular purpose of achieving three overarching objectives: ending poverty, protecting the planet, and ensuring prosperity for all. The Planning Commission’s successor, NITI Aayog, has been entrusted with mapping the targets with different ministries, coordinating with them and helping the government meet the targets.

Goal 9 of the SDGs says: “Build resilient infrastructure, promote sustainable industrialization and foster innovation.” More importantly, this is directly related to Goal 8: “Promote inclusive and sustainable economic growth, employment and decent work for all.” This goes directly to the heart of the debate between fiscal hawks and those wanting the government to expand public investment for kick-starting growth; it also provides a compelling reason for the government to increase outlays for public expenditure.

Employment growth remains stagnant across the world. A joint study (goo.gl/ZvLcsf) by the International Labour Organization, the World Bank, the International Monetary Fund and the Organisation for Economic Cooperation and Development found employment elasticity (the direct relationship between employment growth and economic growth) in most G20 countries is low, giving credence to claims of “jobless growth”. India’s employment elasticity is said to be close to zero. A 2014 working paper by RBI staffers (goo.gl/U09o8b) has also pointed out how employment elasticity has declined in the post-reforms era, especially in the manufacturing sector.

The Bharatiya Janata Party’s (BJP’s) 2014 campaign manifesto promised to create new employment opportunities: “A strong manufacturing sector will not only bridge the demand-supply gap leading to price stabilization, but also create millions of jobs and increase incomes for the working class.” There were also commitments to create jobs in the small-scale sector, agriculture and agri-related industries. Unfortunately, the narrative in many states with high unemployment rates has changed thereafter.

So far, official data and anecdotes both indicate demonetisation-induced livelihood stress in urban and rural areas. People have lost jobs across manufacturing, service and agricultural occupations. Whether BJP wins or loses the approaching state assembly elections, increasing public investment and employment remains a moral imperative.

The above article was published in Mint newspaper on January 25, 2017. It can also be read here

Right Fuel For Economic Growth

The government should have devoted a good part of its spending in building infrastructure. This would not only have alleviated pressures on the price line but would have also boosted investment growth

IT IS time that the government steps up to the plate. With the global economy slowing down perceptibly and policy advisers in the government trying to figure out how the ripple-effects will impact India, there is a need for the government to act now, in a meaningful economic manner that provides the right fuel for the economy’s tank. This is not to suggest a return to the old ways of command and control but to provide the right growth impetus to economy. The urgency has got somewhat heightened by the latest inflationary figures.

The government has so far relied on the central bank to sort out some of the large and pressing economic problems, but it’s now time to shoulder some of that responsibility too. Many commentators have been speculating about the action expected from the Reserve Bank on April 29, when it announces its annual monetary and credit policy for 2008-09, and some have even gone to the extent of suggesting what the central bank should be doing. But the onus for squelching inflationary expectations cannot lie with the central bank alone. The reason for that lies in the nature of the problem and the prolonged frailty of the structural deficiencies.

The superior quality of economic growth in the Indian economy for the past 48 months or so has been fired largely by investment in industry. Prior to that, it was consumption that was driving the Indian economy. It is now being increasingly felt that fresh investment by Corporate India into new capacities may slow down, thereby imperilling the very foundation of the sound growth experienced over the past few years. Real investment has grown at an annual average rate of 17% since 2002-03. Or, in other words, investment has been contributing to over 35% of GDP every year. While consumption was earlier the main driver for growth, the contribution of investment to growth over the past four years has been outstripping that made by consumption. However, recent data on investment growth does show some softening from the previous growth levels.

For instance, bank credit to the commercial sector, as reported every fortnight by the Reserve Bank, has been showing a declining trend. Bank credit to the commercial sector (food plus non-food credit) as on June 22, 2007, over March 30 was down 1.7% compared to a growth of 0.9% in the same period in 2006. At the end of the second quarter, bank credit in the first six months was up 5% compared to 10.2% in the first six months of 2006. For the first nine months, bank credit grew only 11.3% compared to 17.2% in 2006. And, finally, bank credit on March 14, 2008, was up 17.8% in 12 months, but far lower than the 24% recorded in the 12 months of 2006-07. It also seems that there is some tapering off of the volume of investments announced as well as the volume of investments implemented.

The government seems to have anticipated this trend. In the budget, the finance minister cut personal income taxes in the hope that some of the resulting increase in disposable income would find its way into additional consumption. Also, the sixth Pay Commission’s recommendations are expected to kick in from the third quarter — the government also seems to be banking heavily on the resulting consumption surge to work some wonders for the economy. Add the additional push from the states, and some economists expect the consumption party to continue till March 2010.

BUT that still does not take care of the deeper problems that are simultaneously plaguing growth as well as stoking the inflationary fires. One of the core issues is the supply-side afflictions. True, part of the push to the WPI has emanated from global food prices. But then the contribution of domestic supply-side problems has neither diminished nor can it be wished away summarily. And, it is here that the government seems to be failing in its role.

Take a look at the capital expenditure (plan plus non-plan) budgeted for 2008-09. Total capital expenditure during 2007-08 amounted to Rs 1,20,787 crore (revised estimates). If the one-time expenditure of Rs 35,531 crore incurred on acquiring the RBI’s stake in State Bank of India is deducted, the comparable figure works out to Rs 85,256 crore. When compared with the actual capital expenditure of Rs 68,778 crore for 2006-07, this is a good 24% higher. But, against the Rs 92,765 crore budgeted for 2008-09, the growth under this head is only about 9% this year.

That is a sharp drop in government’s spending for building assets. One would have expected that in times like these, the government would have devoted a good part of its spending in building infrastructure — such as roads, bridges or power distribution networks in rural areas — to sort out some of the supply-side bottlenecks. This would have then taken care of not only alleviating some of the pressures on the price line but would have also continued to provide the required impulse to investment growth. Two issues arise hereon.

• Prima facie it seems corporate investments into fresh capacities do not seem to be strategic about business cycles. Fresh research might be needed on whether companies wait for sufficient internal accruals before embarking on capacity-creation, primarily because the trust on external sources — particularly the bond markets — could be low. That threatens to then impinge on another acknowledged source of GDP growth — overall productivity growth in the economy.

• Given that the government’s expansionary fiscal measures could be feeding the demand-supply gap for some more time to come, the RBI’s task in managing the price line becomes that much more difficult. The question that arises then is: will the next policy, therefore, follow the predictable path of demand suppression or selectively ease funding of fresh capacities to step up supplies, especially to the rural and SME sectors?

Admittedly, walking the fine line between growth and inflation is becoming increasingly perilous.

Published as an Op-Ed in The Economic Times (April 11, 2008)