Taking of experts: the economic reactivation could take longer than expected
NEW DELHI: Now we have a medium-term macro vision for the Indian economy . It is the vision to reach US $ 5 billion by 2024-25. What the Budget tries to do is to focus on this vision and, at the same time, to improve the life of the common man: to live. While the $ 5 trillion GDP goal In our opinion, it seems to be discouraging, the government seems to have made many correct steps to untangle the problems that are holding back the economy, especially investments .
Despite the calls for privatisation of public sector banks, the Budget actually tries to strengthen them by substantially increasing allocation for recapitalization. This, if it is implemented quickly, could enable a significant revival in credit offtake. The Budget also talks about increasing investments in infrastructure through PPP mode and has set a huge target of Rs 100 lakh crore. However, as the Economic Survey pointed out, in order to increase investments there is a need to augment savings too. In fact, the Survey argues that the savings rate should be higher than the investment rate in order to achieve 8% growth for the next five years. But the Budget ignores this issue with no specific proposal for savings. And it seems to take the Survey’s view that it is only the lower cost of capital that would lead to investments . This in my view is not backed by the empirical data. What has been found of late is that interest rates are a major determinant of savings. Now, in the absence of any policies for domestic savings, it appears that we might have to depend more on foreign savings, which could be risky. And the government has already hinted about borrowing from abroad to finance the fiscal deficit!
In the fiscal aspect, the finance minister has said that the deficit for the year 2019-20 will be 3.3% against 3.4% in 2018-19. This suggests that if the government continues to follow the fiscal consolidation roadmap, it would eventually lead to a public debt target of 40% by 2024-25, from the current level of 48.4%. This seems to be a difficult task, especially when the quality of the fiscal adjustment that the Center follows is not likely to be expansive. As shown on the expenditure side, there are huge interest payments due to the increase in public debt, which are reducing the fiscal space for the government. It is important to make a change in the FRBM framework that was adopted last year, which does not even take into account some of the expected expenses, such as the achievement of sustainable development goals. And here is the major risk. If the proposals to revive investments (especially private investments ) do not materialise and if the government does not undertake expansionary fiscal measures with its concern about fiscal targets, then the revival in the economy could take longer time than expected. Going by the recent experience, such situation could be the most plausible one and the government needs to be more cautious.
N R Bhanumurthy, National Institute of Public Finance and Politics
(The author's opinions are personal)