Twin devils douse stimulus hopes

The Narendra Modi-government is unlikely and unwilling to give any budgetary stimulus as it feels borrowing money for the stimulus will lead to the twin devils of a higher fiscal deficit and an inflationary spiral rearing their heads, besides being difficult to sustain.

By Jayanta Roy Chowdhury
  • Published 20.10.17
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New Delhi: The Narendra Modi-government is unlikely and unwilling to give any budgetary stimulus as it feels borrowing money for the stimulus will lead to the twin devils of a higher fiscal deficit and an inflationary spiral rearing their heads, besides being difficult to sustain.

However, it will go in for an off-budget stimulus, including an infusion of capital into the banking system through recapitalisation bonds and a higher spending by PSUs.

"The finance ministry has done a thorough exercise on the issue and we do not feel that it would be wise to exceed the fiscal deficit of 3.2 per cent of GDP at this stage, even if it be to give a stimulus as is being demanded by some economists and industrial lobbies," said top North Block officials.

The PM's Economic Advisory Council and the RBI, too, do not seem to favour a widening of the fiscal deficit.

Instead, the government will concentrate on improving the quality of spending by its departments, especially those responsible for infrastructure such as the railways, highways and ports as this would lead to a greater demand for a host of goods such as steel and cement which would push growth.

Officials said that the finance ministry was keen that spending plans were completed on time with at least 75 per cent of the funds for the financial year utilised by December.

India's economy had slowed to 5.7 per cent in the April-June quarter of 2017, its slowest in 5 years, according to data released last month.

The slowdown is being blamed by analysts on two key decisions taken by the Modi- government - demonetisation or banning of high denomination notes which accounted for 86 per cent of India's currency and the introduction of the GST, which seeks to replace a host of state and central levies.

Some economists have called for a fiscal stimulus to stoke flagging consumer demand.

However, the government is facing a dilemma as a faltering economy and uncertainty over the GST may mean tax collections to be less than expected.

A 12 per cent increase in net tax revenues has been estimated for the year, with the bulk of it coming from indirect taxes. However, the introduction of the GST with its complications seems to have resulted in the slowing down of economic activity and may have resulted in lower than expected net revenue collections.

"The tax concessions by way of cutting taxes on fuel and reduction in the GST should also be considered as a form of stimulus which could potentially increase demand," said N.R. Bhanumurthy of the National Institute of Public Finance & Policy, a North Block-funded economic and financial think tank.

A quick move towards resolving the GST snags especially for traders, small businesses and exporters who employ the bulk of India's workforce is now considered a priority. "Cutting red tape, simplification of taxes and revising them downwards from the 28 per cent and 18 per cent bands in many cases can be expected," said officials.

"Given our problems with revenue growth and fears that an increase in borrowing will lead to higher levels of inflation ahead of crucial elections, it is felt that the best way out is to go in for off-budget stimulus," said the officials.