Budget: Will Finance Minister Nirmala Sitharaman press the FRBM ‘escape clause’?

Budget documents usually paint a rosy picture of an ailing economy. The 2020-21 Budget is unlikely to be different. The ruling party generally takes credit for all good and throws the blame for all that has gone wrong at the doorstep of its predecessors and sometimes on unfavourable international factors.

However, when it turns too difficult to hold others responsible for the adverse outcomes of their own policies, governments placate people by making it seem that what appears to be bad is actually in their best interest. In Budget season, we hear phrases like “short-term pain for long-term gain” or “bite the bullet.”

Transparency, the best policy

But this time it is not easy to beguile people into believing whatever the government says, with the glaring economic slowdown and its palpable effects. So, it would be in the best interest of the government to gracefully accept its failures. That honest admission will help it seek people’s approval for the bold decisions required for the course correction. The government should not shy away from projecting the actual state of the economy.

Real GDP, as per the Central Statistical Organisation’s advance estimates, has fallen to 5% in 2019-20 from 8.2% in 2016-17, and nominal GDP to 7.5%, a 44-year low. Similarly, the 2017-18 unemployment of 6.1% was its 45-year high.

The economy as a whole is deeply entrenched in a vicious circle as apparent from several indisputable indicators. The performance of all three sectors of the economy -- agriculture, industry and services -- has been disturbing. The industry’s performance has been alarming, with low production of consumer and capital goods. The aggregate level of investment in the sector of about 30% during the last two years was less than the 15-year average and much below the 2011-12 peak of 39%. Due to a lack of demand, the manufacturing sector could not utilize a significant part – 30% -- of its installed capacity.

Agriculture’s growth is no better. The agricultural GDP growth has been markedly declining in recent years. In 2018-19, the sector registered a growth of a mere 2.75% against 5% the previous year.

The services sector, which accounts for 54% of India's Gross Value Added (GVA), registered a moderate growth of 7.5% in 2018-19, lower than the 8.1% in 2017-18.

Stagflation challenge?

Adding to the weak performance of different sectors of the economy and demand contraction, the consumer price inflation touched a 5-year high of 7.35% in December, with food inflation at 14.12% (against -2.65 in December 2018). Vegetable prices, including onion prices, have contributed by a high 60.5% to food inflation. Inflation thus poses a danger at a time when growth is stagnating.

With a fall in incomes and rising unemployment leading to slackening demand for goods and services, investments have further eroded. Whatever be the causes, the sectors with high employment potential – construction, Medium, Small and Micro Enterprises (MSME), etc – have suffered a severe jolt.

Bank credit offtake has been low, with lack of investment avenues. On the other hand, the Non-Performing Assets (NPAs) have been rising. The NPAs as of September 2019 stood at 12.7%, amounting to more than Rs 9 lakh crore, with further increase to 13.2% likely by September 2020.

Naturally, when the economy is not growing, the revenues to the government are low, with low tax collection, which might fall by as much as Rs 3 lakh crore this year.

Dwindling Budget

The scope for government spending has shrunk from an already reduced spend due to its being wedded to maintaining a low fiscal deficit, as per neo-liberal economic policies. We see the Budget size falling over the years from 17.43% of GDP in 2009-10 to 13.2% in 2019-20.

There is not enough room for the government to adequately allocate for capital expenditure, after meeting the essential expenditure out of the scarce resources and fiscal deficit constraints. For example, of the 2019-20 Budget rupee spent, 23 paise went towards states’ share in taxes. Out of the remaining 77 paise, 47 paise (or 61% of the money at its disposal) went for its compulsory spending, including interest payment (23%), defence (12%), subsidies (10%), Finance Commission transfers (9%) and pensions (7%). Thus, the amount left for central and state schemes and other expenditure was only 39%. The dwindling Budget cake lowers this share.

Also, the government has failed to garner enough resources through the disinvestment route. It has so far realized only 20% of the proposed Rs1.05 lakh crore for 2019-20.

So, what are the government’s options? To revive the economy, it needs to revv up demand and induce investment, increase employment and instil confidence. Besides encouraging private and state government investment spending, the Centre too needs to boost spending. For all that, it needs money. It needs to give tax sops to some to encourage consumption demand, and collect more from some others, to offset the loss; it cannot avoid the principle of “heavier weights on broader shoulders.”

Yet, it needs to borrow heavily to meet its mammoth spending. The recourse can be through some sleight of hand – spending heavily but showing lower than actual fiscal deficit. This is achieved through the public sector entities like Food Corporation of India and NABARD borrowing on government’s behalf. This increases the contingent liabilities – the off-Budget items which tone down the fiscal deficit but not its repayment obligation; it is a kind of window-dressing.

Or, the government can itself honestly borrow and increase the public debt further in the hope of energising the economy. Since a robust economy can alleviate the problems of unemployment, slow growth, etc., the government can tap the ‘escape clause’ of the NK Singh (FRBM) Review Committee, even exceeding the overshoot limit of 0.5% suggested by the committee. The government might dislike the idea, but it has no other means to wriggle out of the imbroglio it finds itself in.

(The writer is a Development Economist and commentator on economic and social affairs)