Expand Capital Expenditures To Boost Economy: Summary

deepak mehto
By deepak mehto September 18, 2019 12:17

From a level of 8.1 percent in the fourth quarter of 2017-18, quarterly GDP growth fell to 5 percent in the first quarter of 2019-20, a fall of 3.1 percentage points. The slowdown of the Indian economy is no longer in dispute and calls for measures such as expanding capital expenditure to boost economy.

Current problems in the Indian economy

  • Several sectors such as automobiles and housing are facing a sharp weakening of demand.
  • And there has been a significant fall in the savings and investment rate.
  • Within household savings, the proportion of savings in financial assets has sharply declined.
  • Apart from these, a significant growth-stifling factor is the weakness of the banking and non-bank finance sectors due to both cyclical and structural reasons.
  • Policy initiatives that are failing to provide a boost
  • The RBI has reduced the repo rate by 110 basis points since February 2019, reducing it from 6.5 percent to 5.4 percent.
  • The central government has also undertaken a number of steps post the 2019-20 budget which includes the withdrawal of enhanced surcharge on foreign portfolio investors, a public sector bank consolidation plan, additional depreciation rates for vehicle manufacturers, additional credit support for housing finance companies and recapitalization of public sector banks.
  • The slowdown appears to be continuing in spite of these measures.
  • The saving rate has fallen from 34.6 percent in 2011-12 to 30.5 percent in 2017-18.
  • The investment rate, which is dependent on the saving rate supplemented by net capital inflows, has also fallen from 39 percent of GDP in 2011-12 to 32.3 percent in 2017-18.
  • This persistent downward trend of the saving and investment rates has led to a fall in India’s potential growth rate to below 7 percent.
  • The monetary authorities have reduced the policy rate but banks have not followed suit due to structural problems against the background of rising non-performing assets.
  • The implicit price deflator has fallen more than 3 percentage points compared to the average of 2012-13 to 2013-14 and 2017-18 to 2018-19.
  • The growth in central tax revenues fell by 3.5 percentage points and that in the states’ own tax revenues by 4.7 percentage points during the same periods.
  • These changes have left limited space for augmenting capital expenditure. The Centre’s capital expenditure is currently languishing at 1.6 percent of GDP.

Expanding capital expenditure as a solution to boost economy

  • In the present context of a declining investment rate and declining demand, a good solution will be to enhance government expenditure, especially capital expenditure.
  • Other changes in the financial sector during recent years may also have had a structural impact. For example, GST has changed the structure of indirect taxes.
  • The countercyclical policy is primarily the responsibility of the Centre. Given the revenue trends, it may not be in a position to increase its capital expenditure relative to GDP.
  • Other available options include bringing on board state governments for increasing their capital expenditure relative to their respective gross state domestic products (GSDPs).
  • Second, the Centre may invest through central public sector enterprises (CPSEs) an additional one percentage point of GDP compared to the present levels.
  • Further, through the public-private partnership (PPP) model, the private sector may be induced to supplement the government’s investment in select projects.
  • The amended FRBM Act has a provision for increasing the fiscal deficit by 0.5 percent of GDP under certain circumstances. The government can use this provision.
  • The present slowdown is happening at a time when industrialized countries are themselves passing through a recession. Boosting export demand at such time becomes difficult. But it is still not impossible to raise exports. The recent announcements on boosting exports is a recognition of this. Allowing the rupee to depreciate steadily may help exporters.
  • The government should explore all avenues to expand its capital expenditures. Public investment in the present context may crowd in private investment.

Conclusion

  • To boost economy, it is time to look at structural reforms in the banking sector, governance in general and the fiscal reforms relating to direct taxes and GST.

Also read: Way To Boost The Economy

What Does It Mean For India To Become A $5-Trillion Economy?

Source

deepak mehto
By deepak mehto September 18, 2019 12:17