india govt debt: View: Fiscal stimulus — balancing the present with the future

Economy


By Nilaya Varma

“The problem with the future is that it keeps turning into the present.”
— Bill Watterson

The world is going through unprecedented times, and fears associated with the contagion, job loss, business continuity and the ensuing national economic fallout, are spreading like wildfire. As the pandemic unfolds, it is becoming more than a health emergency, metamorphosing into an economic emergency, where the scars will be visible beyond those of the human lives infected with Covid-19.

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RBI and Government have taken some steps to respond to the new economic reality. With business activity slowing, there will be an impact on public revenues, with perhaps a first-ever negative income at the central government level. The silver lining is that the perception of Indian businesses is still more optimistic than most of their western counterparts, and the negativity associated with global business continuity in China, may present an opportunity.

GoI has announced a financial package at 0.8% of GDP, but there is a growing voice for additional massive stimulus. It remains to be seen, if additional economic stimulus will be able to address all the challenges expected by the private sector, which wants the stimulus to be more sector-specific to ensure targeted interventions.

State Governments and industries have a long list of expectations ranging from front-loading of grants, increasing FRBM limits, interest subvention to farmers, MSMEs, EoUs, payment of minimum wages for workers, etc. At the same time, fiscal constraints need to be considered, and states must judiciously monitor both the rationalization and quality, of their inflow as well as of expenditures in the coming times.

When the future looks gloomy, it makes sense to relook at the last few decades of economic performance to understand the reasons behind the constricted stimulus. At Rs 97.25 lakh crore, the Indian government’s debt is huge, even as it is indebted to the world for around Rs 2.92 lakh crore. This indebtedness shrinks our capacity to undertake out-of-budget-emergency spending to the tune of what most developed countries are doing.

From the political pressures of a 2-party system to the struggle for differentiation between regional parties, Indian economy bears the brunt of fiscal populism at the cost of fiscal prudence. In the 2019-20 Union Budget, the Central Government increased number of welfare schemes from 83 to 122 (6 ‘core of the core’, 23 core, and 93 major central sector). At the same time, the Indian states are spending significantly on welfare, while struggling individually with a marked revenue deficit. In 2019-20, Maharashtra Government estimated a fiscal deficit of around Rs 78k crore, while allocating almost Rs 56k crore towards social schemes. Similarly, the states of Kerala and Odisha had a revenue deficit of Rs 26k crore and Rs 18k crore respectively, while allocating more than Rs 13k crore and Rs 21 crore respectively, to welfare initiatives.

The reality is that only a few financially well managed Indian states earn enough to fund salary, pension and loan repayments. Inflation-adjusted CAPEX at the state level isn’t sufficient to cater to drive the rate of growth that will truly help the under-privileged move up the growth ladder, let alone address externalities that we face today.

The additional pressure exerted by COVID-19 has forced Governments to commit more to social spending, even as the economy needs major stimulus. Thus, it is sensible that governments investigate their sources of income and expenditure to arrive at a ‘sweet spot’. With the additional budgets that will be made available to manage COVID-19 impact, a capping should be enforced on the States’ planned spending as additional welfare freebies, for at least the next three years.

I would propose the development of a national consensus that expands the FRBM to enhance transparency in India’s fiscal management systems. A limit on non-asset producing expenditure will help in spreading out the state’s debt across several years including for state governments it could be for example limiting the distribution of freebies/additional welfare expenditure to 25-30% of Central Government’s contribution.

I also believe that India should design of a common framework to ensure income support for the vulnerable and disadvantaged population. To combat adversity, it may be preferable to provide a lump-sum amount, equal to the minimum wage for all eligible household members of the family. Such a lump-sum transfer, replacing other monetary transfers, would reduce the suffering of about 15 crore families including labourers, construction workers and farmers. The Governments can consider creating a benefits management platform that allows the beneficiary to choose relevant benefits from the multiple options, capped by the lump-sum amount available to them.

Given the unlimited welfare spending that has become a sine qua non of governance, fiscal prudence has been majorly hit. It is time for the Government to recognise this trade-off between political populism and economic development, to arrive at targeted interventions for the needy and for spurring the economy. This would require spending on capital projects, a robust benefits-management mechanism, and a check on unlimited spending by states, if we wish to upgrade our country to the next level of development.

The author is the Co-Founder & CEO of Primus Partners



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