Can Modi govt spend its way to growth with Rs 50,000 cr stimulus package?

Illustration: Ajay Mohanty
In view of the economic slowdown, the government is reported to be open to allowing the fiscal deficit to exceed this year's target as it considers a stimulus package in the range of Rs 40,000-50,000 crore by way of increased spending.  

Growth in Asia's third-largest economy slowed to a three-year low of 5.7 per cent in the quarter that ended in June, and Finance Minister Arun Jaitley said on Wednesday that the government was looking for ways to speed it up.

However, as the government looks at "additional moves that are necessary" to arrest the economic slowdown, is attempting to spend its way to growth a good idea?

While several voices have called for a looser fiscal policy, such a policy has its own associated dangers and challenges. 

Stimulus package under consideration

A stimulus package in the range of Rs 40,000-50,000 crore is being discussed in the government, though these figures could not be immediately confirmed. (Read our full report on the fiscal stimulus package under consideration by the government)

Earlier this week, Jaitley held a series of meetings with Commerce Minister Suresh Prabhu, Railway Minister Piyush Goyal, NITI Aayog Vice-Chairman Rajiv Kumar and officials from the finance, commerce and railway ministries.

The meetings, Business Standard has learnt, discussed raising resources to finance capital spending beyond the Rs 3.10 lakh crore budgeted for 2017-18 through higher borrowing or disinvestment receipts.

Can the government spend its way to growth?

Back-of-the-envelope calculations show that a Rs 40,000-crore increase in capital spending could lead to a fiscal deficit of 3.5 per cent of the gross domestic product (GDP), against the Budget estimate of 3.2 per cent. 

According to a Reuters report, the government may be ready to let the fiscal deficit widen even further beyond this year's target. Two government officials, cited by the Reuters report, with direct knowledge of the plan said the extra spending was estimated to widen the federal fiscal deficit for the financial year ending next March to 3.7 per cent of GDP. (Read the full report here)

"The fiscal deficit is not a sacrosanct number," one of the officials told Reuters. 

However, such a spending programme has its risks. Friday's Business Standard editorial highlighted these challenges: "A repetition of the 'taper tantrum' of 2013, when the Indian economy teetered close to a balance-of-payments crisis, seems unlikely. Foreign exchange reserves are at record levels. But macroeconomic stability is fragile as long as it is dependent on stable and relatively low oil prices and steady inflows of foreign capital." 

(Read the Business Standard editorial on why the government should keep the fiscal deficit in mind)

Further, actions by the US Fed also need to be considered. The editorial explained: "Now that the United States Federal Reserve has indicated that it will begin unwinding its extraordinary bond-buying programme, India must brace itself anew. Under such circumstances, abandoning fiscal restraint would be deeply irresponsible." 

Along with these factors, the Goods and Services Tax regime's impact on the Centre and state's revenues also needs to be considered. Taking into account all the various circumstances in play, the editorial said: "No new spending programme can be embarked upon under such uncertain conditions."

Government revenues have already taken a hit

Before reports emerged of the government considering a spending programme, a Reuters report, which cited two unnamed finance ministry officials, from last week had said that the government could be forced to cut spending on key infrastructure such as railways and highways as lower-than-expected tax collections and sluggish growth have upset the government's budget calculations. (Read the full report here)

Tax receipts were about $7.8 billion in July, a little over half the monthly target, mostly because millions of firms failed to comply with the new GST system.

"There is a concern over lower tax collections," a senior finance ministry official had said.

The revenue shortfall could be at least Rs 80,000 crore ($12.5 billion) if the current trend continues until the end of the year, a second official said.

Focus may be on affordable housing

The government could use the affordable housing route to help the economy out of the blues and generate jobs. Social sector schemes could also be revised to boost demand and rev up the slowing economic growth, sources said.

(Read our full report on how the government could revive the economy with social sector schemes)

Sources told Business Standard that the government was not particularly worried about the headline GDP growth number, which slowed to 5.7 per cent in the first quarter of FY18. This was the lowest growth under Modi. Rather, job creation was an urgent priority for the government, they said.

To focus on affordable housing, an idea which is being actively considered is to free up large land parcels held by public sector undertakings (PSU). This could act as a stimulus for the real estate sector as land acquisition is a major challenge. PSU lands are mostly in prime city localities and if developed in a proper manner, could lead to a boost to the sector.

Another step that may be looked at is tweaking of social sector schemes such as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and Pradhan Mantri Gram Sadak Yojana (PMGSY) to generate temporary or semi-permanent jobs in the hinterland and also in semi-urban areas. However, this might take time, as tweaking laws would require Parliament approval. However, the Ordinance route could be considered for faster execution.

Where does the fiscal deficit stand today

The Centre’s capital spending estimate for 2017-18 is 25 per cent higher than the Rs 2.47 lakh crore target of 2016-17 and 11 per cent higher than the revised estimate of Rs 2.80 lakh crore.

The fiscal deficit in April-July was Rs 5.05 lakh crore, about 92 per cent of the 2017-18 budget estimate of Rs 5.46 lakh crore. This is due to frontloading of expenditure because the Finance Bill 2017 was passed before the beginning of the fiscal year.

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