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India needs fiscal discipline, said the World Bank on Friday, but not at the expense of capital expenditure. Even more so now, as the Iraq crisis could pull down world growth by 0.2 percentage points in an extreme situation, it said.
The Bank also suggested India proceed with a national goods and services tax (GST) to attract investments and make a strategy on attracting jobs vacated by China in the manufacturing sector.
"It is wisdom to be fiscally disciplined and it is dangerous to let the fiscal deficit widen," said Onno Ruhl, the Bank's country director for India, at a press conference on the Global Economic Prospects report issued last week by the multilateral agency.
The report had pegged India's economic growth at 5.5 per cent in the current financial year against below-five per cent growth in each of the past two years. However, if a sub-normal monsoon turns out to be too severe, it might pull down India's gross domestic product (GDP) growth by 0.2-0.4 percentage points, said Andrew Burns, author of the Global Economic Prospects report.
"I don't think you need to expand (fiscal) deficit to increase capital expenditure. There is a lot of scope to incur non-capital expenditure efficiently," said Ruhlin response to a query.
He said India needs to spend its subsidies efficiently. He clarified he was not advocating a low subsidy for food fertiliser and fuel but on how efficiently these are spent. "Are subsidies reaching the poor? How can we plug the leakages?" he asked, adding these measures would lead to better outcomes for these subsidies.
Subsidies on food, fuel and fertiliser are projected to increase moderately to Rs 2.46 lakh crore in 2014-15 in the interim Budget from Rs 2.45 lakh crore in the revised estimate for 2013-14. However, budget estimates are often revised. For instance, the previous budget had pegged these subsidies at Rs 2.2 lakh crore.
To a query over the impact of the Iraq crisis, Ruhl said India, being an energy deficient country, could be faced with an increase in fiscal pressure on the fuel side. Dealing with the situation will require a greater fiscal discipline.
Burns said if in an extreme situation the Iraq crisis leads to a surge in oil prices by $25 a barrel and it remains there for six months, it would pull down global growth by 0.2 to 0.4 percentage points. For the global economy, the World Bank lowered its growth projection for 2014 to 2.8 per cent from the three per cent made in January.
The Indian basket of crude oil purchased had risen to around $112 a barrel on Wednesday from $107 at the start of the month. There were indications that the government might go for a one-time increase in the price of diesel and raise the rates for subsidised cooking gas in tranches of Rs 50.
The Centre's fiscal deficit is projected to come down to 4.1 per cent of GDP in 2014-15 in the interim Budget from 4.5 per cent the previous financial year. It is to be seen whether Jaitley sticks to the target set by the interim Budget.
Ruhl said the government needed to take a few steps to push investments, to drive up economic growth in India.
"You just need a few measures to get investment start going. The number one is GST. It will make India one market," he said.
The government requires to amend the Constitution for a GST. In the current scheme, the Centre cannot impose a duty on goods beyond manufacturing and states cannot levy a services tax.
The ruling National Democratic Alliance is short of a two-thirds majority, or 361 seats, needed for the amendment in the Lok Sabha. In the Rajya Sabha, the ruling alliance has 62 seats but needs 160 votes to pass the Bill. Half the states also need to okay the Bill.
Burns said productivity of capital and labour had both fallen in India, resulting in a fall of investment in the fourth quarter of 2013-14. Gross fixed capital formation, a proxy of investment, declined by a little less than one per cent in this period.
Ruhl suggested simple tax administration, less of 'inspector raj', labour reforms and improving the performance of power distribution companies to increase the factor productivity in India. He also stressed on unlocking the value stuck in various public-private-partnership (PPP) projects by re-pricing some of these and changing the rules in others.
He said China's increased level of development will prompt it to shed manufacturing jobs. "It is an opportunity for India to shift these jobs to the country. It depends on India whether these go to, say, Vietnam or to India," he added.
For getting those jobs, India also needed to connect with those markets. There are going to be two important agreements --The Transatlantic Trade and Investment Partnership between the European Union and the United States and the Trans-Pacific Strategic Economic Partnership Agreement. For India, the latter would be more beneficial, Ruhl said.
