No easy answer to economic slowdown

By moderator July 8, 2019 14:31


T.T. Ram Mohan, a professor at IIM Ahmedabad expressed his views on budget 2019

Important Analysis

    • The ratio of fiscal deficit to GDP.
      • A decline in the ratio is cheered by commentators and the markets. An increase is seen as a setback to reforms.
      • In 2011-12, the fiscal deficit to GDP ratio was 5.9%. By 2015-16, it had declined to 3.9%. Thereafter, it has got stuck at around 3.5%. 
      • The fiscal deficit for 2018-19 has ended up 3.4% of GDP; for 2019-20, it is estimated at 3.3%.
  • The government has had some success in reining in traditional items of revenue expenditure. Major subsidies (food, fertilizer, petroleum), which used to claim 2% or more of GDP, have stabilized at 1.4% of GDP.
        • But new items of expenditure have emerged. The PM-Kisan scheme, which provides ₹6,000 for each farming household per year, will cost the government ₹75,000 crore in 2019-20. 
        • The outlays on the National Rural Employment Guarantee Scheme have crept up with each passing year.
  • Fall in Tax to GDP ratio
      • The expectation following demonetization and the introduction of the Goods and Services Tax (GST) was that both direct and indirect taxes would rise. As a result, the tax to GDP ratio would move to a different trajectory. But it turns out to be a big disappointment.
      • The Budget for 2018-19 projected the tax to GDP ratio to rise from 11.6% in 2017-19 to 12.1% in 2018-19 and further to 12.4% in 2019-20. 
        • But the Budget for 2019-20 estimates the tax to GDP ratio at 11.9% in 2018-19 and 11.7% in 2019-20. The shortfall in GST collections in 2018-19 seems to have set the clock back for fiscal consolidation.
  • To balance the fiscal numbers when the tax to GDP ratio is not coming up to expectations, the Chief Economic Adviser has indicated that the government pins its hopes on capital receipts from disinvestment and the sale of land belonging to the government including public sector enterprises (PSEs).
    • Disinvestment in the sense of strategic sale of PSEs has not really taken off. Much of disinvestment has involved the buying of equity in PSEs by other PSEs. 
    • The sale of government land is bound to be a long-drawn-out process and one with fraught with controversy overvaluation.
      • Moreover, the sale of government assets to balance the Budget merely defers fiscal problems to the future. It is not the answer to the problem of fiscal sustainability.
  • The latest Economic Survey makes clear that private investment is the key driver of growth and jobs.
    • It follows that the government must make fewer demands on public savings so that more of it is available for private investment. In other words, going by the Survey’s analysis, there is no escape from an even sharper focus on fiscal consolidation.
    • Allocation of ₹70,000 crore towards capital for PSBs. 
      • Resolving the twin balance sheet remains the key to reviving private investment. This requires the government to provide adequate capital to public sector banks (PSBs).
        • However, the allocation is meaningful only if it is spent at one go in the current financial year, not staggered over several years. Only then will banks have enough capital to cover provisions for non-performing assets as well as provide loans to firms.
  • The Budget makes an attempt to address the liquidity problem at NBFCs.
    • It provides cover for loss of up to 10% on the purchase of pooled assets of NBFCs of a total value of ₹100,000 crore during the current financial year. Many see it as a government bailout of private NBFCs.
      • But the loss cover is only for six months and is intended only for well-rated portfolios and NBFCs. 
      • Banks may be incentivized to buy more of the portfolios of the better NBFCs, not those of the weaker ones.


By moderator July 8, 2019 14:31