Growth and Fiscal Management
TOPIC: General Studies 3
- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
The 3.2% fiscal deficit target for FY18 has gone up due to CSO lowering the growth for FY18 in its first advance estimate. The blip was expected given the earlier aggressive forecast of 11.75% growth in normal GDP for FY18 which has now been revised down to 9.5%.
While the miss in fiscal deficit target is a marginal 4 basis points for now, it could be higher growth estimates for the current estimates are revised lower during CSO’s second revised estimates.
The CSO’s growth estimate implies real GDP growth to pick up from 6% in first half of FY18 to 7% in second half. While the transitory impact of demonetization and GST is expected to wane in the second half, leading to higher growth, a substantial jump is unlikely.
Growth needs more public spending but there is a need to look beyond than just spending more money.
- The key is boosting private investments– it is not the question of new projects not being taken up as 100 trillion rupees worth of projects under implementation. The companies are going slow as they don’t feel the need to have maximum capacity utilization. Though the fiscal deficit is being brought down, there is no increase in investments from private sector. The problem is the ability to induce the private sector to invest. It will invest once they see demand picking up on a sufficient scale and they can also increase their own capacity.
- Secondly, companies are occupying vast quantities of cash in mutual funds of around 800,000 crores. This is the reason why markets are doing well. But these companies don’t have the capacity to spend it. Here, an action can be taken that as the income which it earns is not part of stated goal as a company, it will be treated as a different tax rate. So if they are making money by investing in mutual funds and they are an engineering company, big profits being untaxed won’t do. These are things which can be done to boost growth and not hurt the fiscal management.
- The size of the budget per se matters and not only the fiscal deficit. In 1991, the union budget was 17% of GDP and today it is down to 12.55% of GDP. So how much the government spends of total output of the economy also has impact on economic growth and momentum.
- PPP projects must be revived so that investments can flow in. The population is now increasingly migrating towards urban areas. The tier-I cities are filled to brim and now is the turn to develop the tier-2 cities, industrial townships and constructions around industrial corridors like DMIC. Increased investments in projects will give rise to increased spending.
- Today the private savings, the non-government sector savings are not being fully utilized by government for investments. So there is plenty of scope for government to tap the savings and use for capital formation.
- The need of the hour is to increase the spending in agriculture infrastructure to attract the private investments in the supply chain. This will create employment opportunities in rural areas, thereby decreasing growing burden on urban infrastructure.
- Improve the governance in the public utility to increase the non-tax revenue with the improvement in the quality of expenditure and quality of public utilities.
- Revive the debt and bond market and increase large infrastructure project funds through bond markets.
Measure for short term and long term
- Increase the demand scenario, with the revival of rural demand.
- More focus on MSMEs development
- Capacity utilization problem will also be solved if there is increase in demand
- Despite rise in crude oil prices or increasing US federal interest rates, India has remained stable.
- Focus on infrastructure development with public spending, particular agriculture sector to solve the supply side problems because inflation is again increasing.
- Focus on export scenario. Global market is reviving but not able to compete due to domestic issues. Focus on exporters to increase competitiveness in international market
- Focus on stalled projects which can revive the demand for raw materials and basic industries.
There shouldn’t be a single goal oriented fiscal policy and single goal oriented monetary policy.
The interest rate, exchange rate and fiscal deficit have to work together keeping in mind internal balance and external balance. It is very important to know whether the deficit is to create asset or run revenue expenditure.
The FRBM is expenditure switching mechanism from revenue deficit to capital expenditure. FRBM has three targets
- Fiscal deficit
- Revenue deficit
- Public debt target
It is more crucial to achieve revenue debt target rather than fiscal deficit. If the government is forced to achieve 3.25 % fiscal deficit, there will be impact on outstanding liability. The 3.2% fiscal deficit was assumed when there were no shocks in the economy. Now there is effect of demonetization, GST which has contributed to ring down the fiscal deficit. Hence, the government should avoid sticking to FRBM target very strictly.
Connecting the dots:
- “Achieving the fiscal deficit target holds key to fiscal management of the economic growth”. Do you agree with the statement? Give reasons for your answer.
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