Budget 2018: macro-stability, not growth, should be main concern

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On the eve of the Union budget, there is a lot of talk on the need to balance growth with fiscal prudence. That is rather mystifying, given the fact that, as we are told time and again, India is the world’s fastest growing major economy.

Consider the facts. The International Monetary Fund has recently predicted, in its latest World Economic Outlook, that India’s GDP growth will pick up from 6.7% this year to 7.4% in 2018-19 and to 7.8% in 2019-20. The World Bank too, in a recent report, said India’s growth in the next fiscal year will be 7.3% and will then go up further to 7.5%. Back home, the latest Reserve Bank of India survey of professional forecasters put GDP growth for 2018-19 at 7.5%. The Economic Survey, prudently hedging its bets, puts growth at 7-7.5% for 2018-19. All of them agree growth is going to get better.

Could it be there’s a disconnect between growth at the macro level and at the ground level? Not at the corporate level—even a conservative brokerage like Kotak expects Nifty earnings year-on-year growth to accelerate from around 5% this fiscal to 24% in 2018-19. The corporate sector is expected to rebound next fiscal.

These forecasts aren’t just statistical exercises. Consider the improvements in the economy. First, everybody agrees that the global economy is, for the first time in years, seeing a synchronous recovery. Stock markets are rallying on the prospects of above-trend earnings growth accompanied by below-trend inflation. That has revived the initial public offering (IPO) and private placement markets in India, making it easier for companies to raise money. The global recovery should improve India’s export prospects. Everybody expects the domestic economy to recover from the disruption caused by the introduction of the goods and services tax (GST). Economists have been telling us that GST will add to GDP growth. Banks are being recapitalized. Credit growth is picking up. The promised benefits of the Bankruptcy Act could lead to a revival of private investment. We’ve improved the ease of doing business. Foreign direct investment is pouring into the country. Why on earth do we need a fiscal push to growth?

In fact, this is a time when we should signal that we’re back on the path of fiscal consolidation. In recent years, while the central government has been pruning its fiscal deficit, the fiscal situation of the states has been deteriorating. Pressures due to the implementation of the Seventh Pay Commission recommendations by the states and the agricultural debt waivers are likely to weigh on state finances. In fact, bond yields have jumped in the last few months and with deposit growth slowing and credit growth picking up, it’s a matter of time before bank interest rates too start moving up. Oil prices are high and that will have an effect on the current account deficit. The latest data shows our trade deficit is widening rapidly. Inflation is likely to go up as growth strengthens—IMF predicts average consumer price inflation at 5.5% for 2018-19. The Economic Survey warns of high stock market prices and possible disruptions in global markets. A loose fiscal policy at a time when there are so many risks to our hard-won macro stability may be adding fuel to the fire.

What then explains the clamour for looser fiscal policy? Very likely, it is due to the fact that the growth is not percolating down to the ground level. To be specific, there are four sectors—agriculture, construction, the informal sector and labour-intensive exports—where we could do with much higher growth. We have a problem with these pockets of the economy which unfortunately provide the bulk of the employment for the masses. The lack of growth in these sectors is therefore a serious political problem. It is a reflection of the fact that growth in India has been very unequal.

It’s not as if the government hasn’t tried to address these issues. It has tried to provide jobs for the masses by building roads and through the affordable housing scheme. Farm distress has been sought to be addressed by loan waivers and crop insurance. GST is expected to be beneficial to exporters. But obviously, if the government is thinking of relaxing the fiscal deficit to fund these sectors, it isn’t enough.

The way to fund more investment in these sectors, albeit not a long-term sustainable one, is the obvious one of privatizing government white elephants such as Air India. True, the current government hasn’t shown much of an appetite for privatization, but the Air India sale should set an example, hopefully followed by the sale of other loss-making companies owned by the central and state governments. With the stock markets so high, this is the ideal time for selling off government assets. That should raise enough money to spend on those segments of the economy that provide the most jobs.

In short, now is not the time to jettison our hard-won macro-economic stability, or policies that have enabled us to move from being one of “the fragile five” to a favoured investment destination. Fiscal prudence is important in achieving that objective. As the Economic Survey puts it, “The agenda for the next year consequently remains full: stabilizing the GST, completing the TBS (Twin Balance Sheet) actions, privatizing Air India, and staving off threats to macro-economic stability.”livemint