Targeting policy instruments and actions for achieving specific economic objectives has long been an accepted tenet of macro-economic and financial policy interventions. One lens for evaluating the Union Budget for 2020-21 is to use this framework. The present economic slowdown is the result of multiple, complex, interlocking reasons, and it will not be easy to crack this mesh open. How best to use monetary, fiscal, trade, labour and regulatory measures, in coordination, will determine the speed at which the economy turns around.
The Budget did the best it could do to stimulate the economy given the extreme paucity of resources. It was a workmanlike exercise, more a statement of account, around which was woven many strands of intent and vision, which, read in its entirety and by connecting interlocking dots, framed a strategy of moving towards a $5 trillion economy over the next five years.
First, a look at the fiscal arithmetic of the Budget. One request from analysts across the board was to present a realistic assessment of the present economic conditions and projections for future growth prospects. To a large extent, the Budget has done this, giving a much clearer picture of the off-balance sheet borrowings, which add to the government’s debt and its obligations to pay. This will enhance credibility among the investor community while taking decisions on committing capital for India’s future.
The nominal growth projected for 2020-21 at 10 per cent is feasible, with a stretch, given the expected rise in inflation, which will add around 4 per cent to a projected 6 per cent real growth. The revenue projections are more aggressive, assuming a buoyancy which can be attributed in large measure to checking evasion using data analytics. The worry is that the growth projections for the two remaining months of this fiscal year, 2019-20, are quite aggressive, and undershooting these will, in turn, make the targets for FY21 even more difficult.
The major boost to revenues is expected from disinvestment and privatisation of central public sector enterprises, together with asset monetisation (selling of various road, rail, land, logistics and other projects which the government has undertaken over the years). The target is up sharply to Rs 2.25 lakh crore. This initiative has been one of the core focus areas of the government, and even though politically difficult, has to be lauded — even more for the effects of increasing efficiency in operations and restricting the losses to the public balance sheet. Disinvestment revenues are likely to be augmented with higher dividend receipts, including, from higher profits of the Reserve Bank of India.
Spending, which depends on revenue collection, has also been optimally allocated, with capital expenditure budgeted to increase faster than revenue. However, capital expenditure is still a much smaller fraction of total expenditure compared to the committed revenue spending on interest payments, salaries and pensions and subsidies. The speech emphasises the need to spend wisely.
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Given this, step back to the economic environment in which the Budget was presented. Growth has slowed to 5 per cent in FY20, and is likely to print even lower (forget about expectations of growth coming in at 5.7 per cent given the downward revision of growth in FY19 from the earlier 6.8 per cent to now 6.1 per cent; that’s a different story).
That India’s slowdown was largely unexpected is evident from the IMF’s markdown of India’s growth from 7 per cent in June 2019 to 4.8 per cent recently. No other country’s prospects, certainly not China’s, have been lowered to this extent. This brings us back to the instrument — objective targeting mentioned earlier.
Three aspects of the current slowdown make it different from previous episodes. First, multiple engines of growth have synchronously decelerated — consumption, investment, exports and sporadically, government spending — compared to earlier ones when one or some of these drivers were still functioning. Second, this is more a demand-led slowdown, versus the earlier ones, which tended to originate with a supply shock, whether from oil or foreign capital. Third, the trigger for this episode was a financial shock — NBFC lending — which tipped the weaknesses building in the system into deep deceleration.
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The proximate cause of the surprise on the extent of the slowdown was a squeeze in the flow of credit from all sources, domestic and offshore, banks, corporate bonds, and external borrowings to companies. A telling statistic released by the RBI shows that compared to Rs 8 lakh crore of loans provided to borrowers during April-September 2018, credit flow fell to Rs 90,000 crore in the six months of 2019. Bank credit has continued to remain very weak. In the context of the broader slowdown, credit to micro, small and medium Enterprises (MSMEs) has been one of the worst affected.
One significant question for policymakers in devising stimulus measures is whether this deceleration in growth is more cyclical than structural in nature. If it is the former, an aggressive use of monetary and fiscal counter-cyclical policy could yield the desired result. If not, then the wait is likely to be longer and will involve more sector specific de-bottlenecking initiatives. While there is certainly a cyclical component in the manufacturing segment — the proximate source of the slowdown — there are signs of deeper structural constraints.
We have heard of the twin balance sheet problems of the excessive debt build up in corporates and banks, but this brake has now expanded into almost quintuple problems, encompassing the government, households and NBFCs. While this indebtedness is indeed being reduced across the segments, the bad loan problem and lack of access to fresh capital is hindering quick resolution.
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Overlaid on these structural impediments is a sharp weakening of consumer, investor and corporate confidence, the result of multiple causes, the prominent among them being the uncertainty on employment as well as the disproportionate enforcement actions. The signature theme of the Economic Survey this year was “the invisible hand of the market supported by the hand of trust”. Fostering trust was also repeatedly emphasised in the Budget speech, and is increasingly evident in the ongoing initiatives of the government for increasing transparency and simplification of processes. A significant step forward is the proposed amendments in the Companies Act for removing criminal liability for acts which are civil in nature.
Implementation, as always, will be key to achieving the $5-trillion goal. The arena for the next set of reforms and actions for sustained growth is at the state level: Agriculture, land, electricity, and even labour. The Budget acknowledges this. A federal approach to tackling the slowdown, in a coordinated fashion, will probably be the most effective.
This article first appeared in the print edition on February 3, 2020 under the title ‘A workmanlike account’. The writer is senior vice president, Business and Economic Research, Axis Bank. Views are personal
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