India Inc’s clamour for a stimulus to restart the investment cycle points to a near unanimous view within the industry — that government has to do the heavy lifting first before it can expect the private sector to restart investments. But for the Centre to spend its way out of the downturn, 2019-20 is a particularly bad year given the already stretched fiscal situation and revenue numbers that seem to be faltering early into the year.
At least five of the top industry leaders who participated in a meeting called by Finance Minister Nirmala Sitharaman on August 8 on reviving growth pitched for a “stimulus package” of varying proportions, besides flagging specific problems relating to NBFC lending and sectors such as steel and automobiles.
At the meeting, the clamour for a “Rs 1 lakh crore stimulus” was led by Assocham president B K Goenka, supported by CII representatives and other members of the delegation, even as JSW Group chairman Sajjan Jindal said that it was conveyed that the government was going to take action “very soon”.
SBI chairman Rajnish Kumar too indicated Sunday that credit demand remained subdued and that there was need for a stimulus in the economy. Infrastructure majors such as Tata Steel, L&T and KEC International have all pointed to the centrality of government spending and improved liquidity conditions in restarting the growth cycle.
The emerging consensus about the requirement of government stimulus to boost growth, however, will face the hurdle of slowing revenue collections and the limited fiscal space for the government to deviate from its fiscal consolidation roadmap.
The government has already started the year by spending less — in the first three months of the 2019-20, 61.4 per cent of the budgeted fiscal deficit has been utilised, 7.3 percentage points lower than the comparable target a year ago, as lower capital expenditure took place as revenues declined. The steady slide in investment activity has been progressively intensifying — evidenced by a nearly 30 per cent drop in capital expenditure by the government in the June 2019 quarter.
Tax revenue growth is progressively turning out to be far slower than the required run rate, reflective of the consumption slowdown in the economy. The demand for the fiscal stimulus by industry is more by way of higher spending on infrastructure sectors such as roads and railways that could have a multiplier effect on downstream industries and the economy as a whole, given that the opportunity for a stimulus of the other kind — a major sectoral reform push that catalyses private investments — has been missed in Budget 2019-20.
At a review meeting on the economy called by Prime Minister Narendra Modi immediately after his Independence Day address, discussions are learnt to have focused on low-hanging, high visibility measures that could impact a stimulus, such as a fund to wrap up housing projects that are in their final stages but are held up, and a warehousing push, which featured in the BJP manifesto.
It is learnt that Finance Ministry officials highlighted the lack of room for big spending, as is being sought by industry. Global headwinds compound matters further, given the inversion of a key part of the US yield curve for the first time in 12 years, alongside Germany and China reporting weak economic data last week, prompting recession fears.
Consensus grows, but little room
The emerging consensus within India Inc. on the need for a government-led stimulus notwithstanding, the Centre has limited fiscal space given the lower tax collections. The Budget was a missed opportunity in terms of signalling reforms.
There is space for investments, given that India needs to spend 7-8 per cent of its gross domestic product (GDP) on infrastructure every year, which translates into an annual infrastructure investment of around $200 billion. The actual spending has only about half the amount so far. The problem is funding it.
This is more so given that the government had reduced its fiscal deficit target to 3.3 per cent of the GDP for 2019-20 from the initial estimate of 3.4 per cent of the GDP in the interim Budget presented in February, crimping the headroom further. The target is likely to be stiff to meet in wake of the slowing revenues, which is likely to prompt the government to tap non-tax revenue options.
That investment has to be a key driver to kick-start the virtuous cycle, which could lead to job-creation, wealth generation, uptick in demand, was highlighted by North Block policy mandarins in the Economic Survey for 2018-19. But even as the Survey has vociferously batted for investment from the private sector to drive growth in the country, bankers and corporate India are of the clear view that spending from government would be necessary to revive the economy, given that the liquidity crunch on account of crisis in the non-banking financial company (NBFC) sector that is acting as a hurdle for private investment.
Given that a windfall on the tax revenue side appears bleak, among the non-tax revenue options, dividends and surplus from the RBI, banks and financial institutions and public sector enterprises would be crucial to prevent a revenue slippage. The other option to raise funds through issuance of overseas sovereign bonds in foreign currency has already come in for criticism from former RBI Governors, economists and influential sections of the government and is unlikely to be implemented this year.
Especially since the government may have to resort to expenditure cuts to stick to its fiscal math, which would be detrimental for the already slowing economic growth. The government’s net revenue growth from direct taxes has decelerated sharply to 4.7 per cent for April 1-August 15 this year as against a required annual growth rate of 17.3 per cent, reflecting lower buoyancy in the wake of an overall slowdown in the economy. With the sharply slower revenue growth, the government’s direct tax targets are looking out of reach for the second consecutive year.
The single-digit growth in tax revenue has, in fact, worsened over the last two months. For April-June, CGA data shows that the net revenue growth from direct taxes was 9.6 per cent which has now slowed further to 4.7 per cent. This is the second year when the government may miss its direct tax revenue targets. Already, as per the publicly available CGA data for the first quarter, the required run rate for the gross tax (direct and indirect) revenue collections was 22.3 per cent and 29.5 per cent run rate for net tax (direct and indirect) revenue collections in the remaining nine months of this financial year. The CGA has so far released data related to government accounts only till April-June.
“The tightening fiscal situation is also reflective in the utilisation of budgeted fiscal deficit during the first quarter of the ongoing financial year. The government’s financial position for the first three months of the 2019-20 shows that 61.4 per cent of the budgeted fiscal deficit has been used, 7.3 per cent lower than the comparable target of year ago. This decline can be attributed to the lower capital expenditure incurred even as revenues declined,” CARE Ratings said in a research note.
Infrastructure developers that rely on government spending are increasingly placing their bets on such projects for growth given that private investments are proving to be sluggish. However, the demand-led slowdown in the Indian economy was further accentuated on account of slower government spending in the first quarter of 2019-20 – as it typically is during general elections.
The industry is already counting on government orders amid flagging private sector investments. “Civil business revenue (and) order intake has slowed down a bit this quarter due to slowdown in industrial CAPEX, cautious approach in taking real estate projects and shortage of manpower due to elections. We have now started focusing on government projects including commercial bidding, metro elevated corridors, airport extensions, etc.where we are gaining traction. With this focus we expect to build a robust executing order book enabling us to achieve the desired scalar plans for the business,” said Vimal Kejriwal, managing director and CEO of engineering player KEC International, in the post-earnings analyst call for the June quarter.
Tata Steel, in its investor presentation for April-June results, pointed out that an increase in government spending and improvement in liquidity will be key factors for steel demand in India to improve during the second half of the ongoing financial year. Engineering major Larsen & Toubro pointed out that it was mainly sectors like roads, expressways, special bridges, flyover projects, etc that were showing strength in investor momentum.
While the current situation has also restarted the debate about the relative merits of tax cuts and government spending as fiscal stimulus measure is a continuing one, most economists argue that direct government spending programmes pack in much greater punch in catalysing aggregate demand than indirect ones like tax cuts.
In the theoretical sense, government spending does not push aggregate demand; it only transfers spending power from one party to another by borrowing from or taxing the public. The resultant government debt (or higher taxes) absorbs private and corporate savings, which translates into private investment going down by the same amount. Also, stimulus by lower taxes leads to lower government revenues, and hence increased government borrowing.
An IMF working paper by Emanuele Baldacci, Sanjeev Gupta, and Carlos Mulas-Granados that studied the effects of fiscal policy response in 118 episodes of systemic banking crisis in advanced and emerging market countries during 1980-2008, found that “timely countercyclical fiscal measures contributed to shortening the length of crisis episodes by stimulating aggregate demand”.
The paper concluded that “stimulus packages that rely mostly on measures to support government consumption are more effective in shortening the crisis duration than those based on public investment. A 10 percentage point increase in the share of public consumption in the budget reduces the crisis length by three to four months. Reducing the share of income taxes is less effective than consumption taxes in shortening the length of a banking crisis”.
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