Economists prefer capex route to boost demand amid economic slowdown

Though MGNREGA and PM-Kisan have clear rural focus, they think excess public spending should only be on capex

While unequivocally supporting fiscal expansion in the upcoming year, economists are urging the government to take the capital expenditure (capex) route, and preferably spend on capital assets and infrastructure projects, rather than raise allocation to rural-centric cash or employment schemes.

Former governor of the Reserve Bank of India, C Rangarajan, told Business Standard that a “little relaxation” of fiscal deficit target would be needed to arrest slowdown.

“Any excess government spending should be investment-led. We are in a situation where an investment slowdown is concurrent with weak consumer demand. Only capex would have a direct positive impact on the economy,” he said in a telephonic interaction.

Saying that the decision to cut taxes for companies was “appropriate”, he cautioned against any cuts in income tax. “While tax cuts have their potential, raising expenditure is a more powerful tool for immediate impact than cutting taxes,” he added.

The government is staring at an unprecedented economic slowdown and shortfall in revenue, prompting it to enhance spending to alleviate aggregate demand. At the current level of gross domestic product, a 0.5 per cent expansion in fiscal deficit would open up funding to the tune of Rs 1 trillion.

Arjun Jayadev, who teaches economics at Azim Premji University, said although enhanced public investments crowd out private investments in the usual sense, the current situation would actually “crowd-in” private investments.

“At a time when virtually no private investment is happening, the rise in government spending could actually prompt private players to invest more. If the government takes steps to restore demand, private businesses are more likely to spend, since they are concerned about falling sales,” he told Business Standard.

Nevertheless, experts also said that the two rural-centric poverty alleviation schemes — Mahatma Gandhi National Rural Guarantee Scheme (MGNREGA) and Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) — if used in a smart combination, could help in supplementing the impact of fiscal expansion through the capex route.

Former rural development secretary Amarjeet Sinha, who coordinated the rural schemes of the government till 2019, said the two schemes serve a different purpose, and directing the funding of the two schemes where they are needed the most would make them more effective.

Source: Union Budget, respective scheme websites

“MGNREGA is a targeted distress employment for labourers, and gets more demand in times of depressed farm prices. In the same situation, PM-Kisan obliterates the impact of weak farm prices for land-owning farmers,” said Sinha.

Mahendra Dev, director of Indira Gandhi of Development Research, said that raising wages under MGNREGA could boost incomes of a significant chunk of the rural population, suggesting the scheme allocation should be raised.

However, he disagreed with economists on the immediate efficacy of the capex.

“Capital-intensive projects in rural areas have a long gestation period, and deliver economic benefits with a lag. On the contrary, PM-Kisan provides immediate consumption boost,” said Dev.

Economists from rating agencies, however, concurred with Rangarajan on the focus on capex.

“In ICRA’s view, fiscal space should be prioritised for capex or infrastructure spending, as that is likely to have a higher multiplier impact on the economy, supporting core sectors, and eventually transmitting into higher discretionary spending,” said Aditi Nayar, principal economist at the agency.

Alluding to the two rural schemes, Rangarajan also said that they provide the much-needed social security net, but that priority should be on public capital spending.

Madan Sabnavis, chief economist at CARE Ratings, echoed the view, saying “spending the enhanced borrowed resources on investments will benefit the most”.

“The preference will be for capex because it is lumpy and will add to demand in the economy. MGNREGA comes second, as it can be combined with some productive employment: Labourers can be employed where enhanced capex is happening,” he said.

“PM-Kisan should be the last priority, as one episode of food inflation, which is currently the case, can wipe out the amount that translates into Rs 500 per month per family,” added Sabnavis.