Ahead of the Budget, Prime Minister Narendra Modi had met a range of people — economists, analysts and industrialists — to understand why the economy was choking and the plumbing it required. He was told, by some who dared to, that a hard landing of the Indian economy has already happened: In just six quarters, the growth rate had almost halved — from 8.1 per cent in January-March 2018 to 4.5 per cent in July-September 2019.
The slowing cycle, of course, started way back in the last two years of the UPA government. But India Inc’s confidence was at its lowest ebb now, companies were sitting on piles of idle cash, suffering substantial capacity under-utilisation, and not planning any fresh investment in the near-to-mid-term. So, the least that was expected when Finance Minister Nirmala Sitharaman rose to present the Budget for 2020-21, was to give solid positive impulses to the economy.
Let us, for once, set aside the argument about the nature of the prolonged economic slowdown — cyclical or structural. There are reasons to suggest there is a strong structural element to the slowdown — and that more strategic thinking and hard reforms are required to catapult India back into a high-growth orbit. Of course, these will yield results only in the medium-to-long term, but in the very short-run, play a critical role in reviving confidence in the market place. But the government has lulled itself into imagining the slowdown is cyclical, and counter-cyclical policies — fiscal and monetary — can reverse the growth path. That be so, but has the government moved with conviction to pursue such policies?
In the Economic Survey for 2019-20 — the period when the economy slid sharply — Chief Economic Adviser Krishnamurthy Subramanian advocated a counter-cyclical fiscal policy by creating additional headroom for increased expenditure. But what actually happened in 2019-20, as revealed by the revised estimates for the year, offers some guidance on what to expect next year. Staring at a shortfall of a massive Rs 3 lakh crore in gross tax receipts in 2019-20, the government slashed current expenditure by 0.4 per cent of GDP for the year, and also reduced the transfer to states by 0.8 per cent of GDP. This despite the fact that it dipped into RBI reserves to realise an extra Rs 58,000 crore.
Cutting transfers to states certainly hurts growth more now than ever before. Over the last seven years, states’ spending, as a percentage of GDP, has increased significantly from just 14 per cent of GDP to about 18 per cent.
Lower transfer to states mean lower spending by them, and reduced contribution to country’s economic growth.
The sharp cuts in expenditure by the Centre, and a one-time windfall from the RBI notwithstanding, the government couldn’t meet its fiscal deficit target. The target was breached by a good 0.5 percentage points to 3.8 per cent of GDP for 2019-20. Given the projections of a subdued real growth rate of under 6 per cent for 2020-21, the government, in its wisdom, also decided to stick to a fiscal consolidation plan, and pare the deficit to 3.5 per cent of GDP in the coming year.
This probably is the prime minister’s imprint on the Budget — the big political call that spending more to impart a positive fiscal impulse to the economy is not worth the risk of a rating downgrade. The Budget, thus, ruled out a counter-cyclical fiscal push, as is reflected in the funds allocated for major sectors and flagship programmes, including the National Rural Employment Guarantee Scheme.
In the last year or so, much of the counter-cyclical monetary push has also yielded no dividend to the economy. The mess in the financial sector has festered long enough — 15 months, if not more. But the government has refused to address the elephant in the room — a frozen credit market. Triggered by the falling of IL&FS, the non-banking finance sector faced one crisis after another. The heavy lifting by NBFCs, in terms of funding small businesses and retail consumers, suffered with no banks willing to lend to them following the crisis of confidence in the NBFC sector.
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Banks were as it is saddled with bad loans, and bankers cringed in fear, not willing to lend. To top it all, policy rate cuts by the Reserve Bank of India meant little to nothing, since banks were not transmitting its benefits to companies and individuals.
This continued logjam needed a solution long ago. The finance minister did take a number of small measures through the year, but it meant nothing. The credit market remains frozen. The markets are unable to distinguish between the good and the bad amongst NBFCs. It is critical to assess the asset quality of NBFCs to understand the extent of mess in individual companies, and look for solutions then. They could be provided capital to help turn around. Not all apples are rotten in the basket. The good ones need to be salvaged. This requires a political intervention. For all the big risks the prime minister has shown appetite for in the realm of society and politics, he chose not to risk anything for the economy.
The government has turned more risk-averse than before since Rahul Gandhi’s “suit boot ki sarkaar” jibe. To reach a $5-trillion size by 2024-25, India needs to grow in double digits over the next five years. But forget that. Low growth is less jobs for the millions entering the workforce, and job losses too. It doesn’t take much time for the resulting unrest to spill onto the streets.
Post script: To the punishment the stock markets meted out to a lacklustre Budget, which neither offered a coherent growth strategy nor any innovation, a senior government official wryly remarked: “The Sensex failed to appreciate things could have been worse.”
Also read | P B Mehta writes: Budget 2020 reads like a five-year plan with lots of targets but no road map
This article first appeared in the print edition on February 5, 2020 under the title ‘No risk, no gain’. Write to the author at email@example.com.