Policy makers discuss ways to boost economy

As the Narendra Modi government plans measures to boost economic growth and create jobs, economists and business fora say it will have to continue its strong spending spree, perhaps at the cost of fiscal deficit targets, to create an enabling environment for the private sector to come in again, and take a hard look at viable but stuck infrastructure projects.

Top policy makers, including Finance Minister Arun Jaitley, Commerce Minister Suresh Prabhu, and Railways and Coal Minister Piyush Goyal, and senior officials met on Tuesday to discuss ways for boosting economic activity.

A number of such meetings are planned before the prime minister is given a detailed presentation on the economy. The activity shows the top rungs of government are looking for solutions to arrest the slide in gross domestic product (GDP) growth. April-June growth dropped to its lowest under the current administration at 5.7 per cent; petrol and diesel prices rose to a near three-year high, in spite of low crude oil prices and a stable rupee.

On Wednesday, Jaitley said the government might come out with some measures. “We have taken note of all economic indicators which are available...the government will take additional moves which are necessary. I will be certainly consulting the PM and when we decide, you will come to know,” he told reporters after the meeting.

C Rangarajan, former head of the Reserve Bank of India, told Business Standard that public spending by the government had increased but private investment remained subdued. “There has to be a major thrust to revive the private sector. A proper environment has to be created (for that),” he said.

Rangarajan, who was also head of former Prime Minister Manmohan Singh’s economic advisory council, said the government needed to take a look at stalled projects and get the ones which are viable up and running. “The government also needs to sit down with India Inc and address sector-specific problems.”

State Bank of India’s chief economist, Saumya Kanti Ghosh, said  private investment will start coming in once of the process to untangle Rs 7 lakh crore worth of toxic assets in the banking system through bankruptcy proceedings starts showing results. Till then, the Centre will have to pick up the slack and let go of its focus on fiscal discipline.

“Private spending will show a lag. The more the Centre delays a boost to boost to public expenditure, the more delayed will be the pick-up in private investment. The Centre has to support the economy in the interim. A 0.5 per cent rise in the fiscal deficit, when compared to the budgeted estimates, should not be a problem,” he said.

The Centre’s budgeted capital spending for 2017-18 is nearly Rs 3.1 lakh crore, a record amount and 25 per cent higher than the 2016-17 budgeted estimate of Rs 2.47 lakh crore, and nearly 11 per cent higher than the revised estimate of Rs 2.8 lakh crore. The fiscal deficit in 2017-18 is budgeted at 3.2 per cent of GDP. 

The fiscal deficit data available so far is for April-July, first four months of the financial year. It shows the difference between expenditure and revenue at Rs 5.05 lakh crore, about 92 per cent of the full-year budget estimate of Rs 5.46 lakh crore. This was due to frontloading of expenditure, as the Finance Bill was passed before the beginning of the financial year. Finance ministry officials have maintained that the Centre will continue spending with the fiscal limits and the deficit target will not be breached.

“Public capital expenditure, including by state governments, must remain elevated. There should not be any cut on account of temporary slowing in revenue collection”, said Chandrajit Banerjee, director general of business chamber CII. 

India Inc has flagged the need to get demand back on track if economic growth is to be brought back. “The demand generation mechanism needs to be shored up across the nation and especially in rural areas,” said Pankaj Patel, head of business chamber Ficci.

He said one way is through cranking up of public spending. Now is the time for the government to really step up and get infrastructure spending off the ground, he said. “Whatever is left of the government’s ambitious targets for the infra space should be rolled out now, as such projects generally have a long gestation time for providing the economic benefits,” Patel added.

“The government might struggle to meet its full-year fiscal deficit target of 3.2 per cent of GDP. Any shortfall in revenue might require a cut in spending in the March 2018 quarter and lower the headroom for a growth-supportive stance,” investment bank DBS, however, warned in a note to clients.

Rangarajan said the Centre needs to cut wasteful administrative spending to find more space for capital expenditure. He says the fiscal deficit target should not be touched.

The meetings taking place among ministers are discussing the recent GDP numbers, fiscal health, implementation of the goods and service tax (GST), its impact on the small and medium sectors, demonetisation, export, investment, big-size infrastructure projects, the rural economy and creation of jobs for the millions who join the workforce every year.

Job creation remains the biggest challenge for the Modi government, analysts agree. “To create jobs, the Centre needs to provide an all-out push to affordable housing, as the construction sector remains one of the country’s biggest employers,” SBI’s Ghosh said.

He agreed with Rangarajan that sector-specific problems need to be looked into and comprehensive, sector-specific packages need to be announced. Rangarajan says job creation will not come from better utilisation of existing capacity but from creation of new capacity.

GDP growth for the April-June quarter plunged to 5.7 per cent, due to demonetisation and destocking by companies following pre-GST jitters. It was 7.9 per cent in April-June a year before.

Growth in manufacturing declined to 1.2 per cent in April-June, from 5.3 per cent in January-March. Mining and quarrying contracted 0.7 per cent, after growing 6.4 per cent in the previous quarter. Agricultural growth lost pace at 2.3 per cent, against 5.2 per cent in the previous quarter and 6.9 per cent in October-December. This was despite crop production growing, even as livestock could not keep pace.