That may not be much of an assurance given the growing sense of disquiet in expert bodies including the Prime Minister’s Economic Advisory Council, the Niti Aayog and the Chief Economic Advisor’s office.
Several policy-influencers in these bodies are befuddled at the Central government’s aversion to spend more now despite their unanimous view that a fiscal stimulus — sooner than later — will place India better to take advantage of the major reforms being pushed in agriculture and labour.
In at least four meetings that Prime Minister Narendra Modi chaired over 10 days between the end of June and early July, The Indian Express has learnt, members of his EAC, Niti Aayog and the CEA’s office, made presentations with participation from senior officials in the PM’s office, the Finance Ministry and the Commerce Ministry.
“There was near unanimity of views on two aspects: i) fiscal expansion or increased spending, and ii) reforms in the financial sector, including stake sale in public sector banks. Key Cabinet Ministers including Amit Shah, Nirmala Sitharaman, Piyush Goyal, Ravi Shankar Prasad and Gajendra Singh Shekhawat were present. The messaging was clear — Modi seemed to be building a political consensus within his Cabinet on spending,” said one of the persons present in the meeting, who did not wish to be named.
Don’t miss from Explained | Why unemployment could become a bigger headache for the govt
Among the specific ideas presented to the political leadership and aimed at imparting a fiscal stimulus were: some kind of a wage subsidy to workers; rural housing — construction of thousand-plus houses in India’s 700-odd districts, building 100-bed hospitals in district blocks which don’t have one, and a six-month urban job guarantee scheme.
The key idea behind these proposals, sources said, was to pursue a counter-cyclical fiscal policy when the economy faces its worst recession with millions of job losses in the wake of the Covid-19 pandemic, and the subsequent strict national lockdown.
“Infrastructure projects such as housing and healthcare will have a significant multiplier effect and will help generate demand,” said another participant, who also did not wish to be named.
The Indian Express spoke to at least a dozen participants, including Cabinet ministers, present in those meetings in June-July. Subsequently, too, the Prime Minister and his office has had separate meetings with various stakeholders, with their inputs being forwarded to the Finance Ministry for further action.
Speaking to The Indian Express last Saturday, Finance Minister Nirmala Sitharam said there was no aversion to spending, and that many of the measures announced including those under the AtmaNirbhar package were still rolling.
To a specific question on extra spending, she said, “I am not closed (on) the option… doing all this, we have kept ourselves open to the idea of… in case, there is any need for further stimulus.”
While more than three months have passed, there has been no action. “What we did was relief, what we need is stimulus,” said a policy expert, who also did not want to be named.
What is worrying the government’s advisors is that the window to execute a counter-cyclical policy in 2020-21 is closing. “The borrowing calendar for the second half announced Wednesday hasn’t changed; the government plans to stick to its target,” the expert said, pointing out this was an indicator of the Centre’s aversion to increase spending.
Think tanks and expert bodies advising the government are concerned that keeping a tight fist may result in the economy ending up with a sharper than expected contraction this year.
Another worry is India may not be optimally placed to shift to a higher growth trajectory once the Covid-19 threat wanes. “The 8 per cent growth target may remain illusory… we should be happy with just 5 per cent GDP growth a year,” said an expert.
Senior finance ministry officials said discussions were still on about the stimulus. One official said, “We will spend; it may not be a big stimulus, but one which will give us the maximum bang for the buck. The non-salaried middle class and the small businesses who have been hit hard, but have not got any support so far, may be recipients of this.”
Another official said that the various proposals made by the experts were still being discussed. “For instance, if we consider wage subsidy, how do we distribute it, whom do we distribute it to – workers in the formal sector, or the informal sector too… These require careful deliberation,” the official said.
A section of officials are also sanguine that the production and capacity utilisation in the manufacturing sector has more or less reached pre-Covid-19 levels, making them ponder if a big stimulus was indeed required. “Economy is recovering faster. Why do we need a stimulus? Further, fiscal space is limited too… Rating agencies are already issuing veiled warnings,” said the official.
But policy advisors note that growth in itself acts as an antidote and ensures debt sustainability in the medium to long term when growth rates are higher than interest rates. In a presentation to the PMO, they have pointed out that given the current crisis which has led to a collapse in demand, focusing too much on fiscal deficit at the cost of growth may be short-sighted. This is especially so for countries like India which have a high growth potential (of 7-8 per cent).
Even NK Singh, Chairman, 15th Finance Commission, told The Indian Express in a recent interview that in times of such stress, the framework for determining ballpark for borrowings, the targets for fiscal deficit and debt consolidation, should be somewhat different.
📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines