oppn parties The Economy: Will The Government Grab The Bull By The Horns?

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  • Bengal starts paying MNREGA workers out of own funds as Central disbursement is stopped due to alleged 'discrepancies' in accounts
  • ISC chemistry paper postponed to March 21 just hours before start of exam due to "unforeseen circumstances"
  • Ghajal legend Pankaj Udhas passes away. he was 72
  • Calcutta HC says that there is no stay on arresting TMC leader Shahjahan and he should be arrested immediately
  • With latest data showing big fall in consumption of food and cereal, the government might rejig retail inflation data
  • Stock markets go down on Monday: Sensex loses 352 points to 72790 and Nifty 90 points to 22122
  • Paytm founder Vijay Shekhar Sharma steps down as chairman of Paytm Payments Bank
  • Rohit Sharma says only players with hunger to perform in Tests will be given chances, issuing a stern warning for those who play truant
  • Fourth Test: Shubman Gill (52 no) and Dhruv Jurel (39no) take India home after they slumped to 120/5
  • Fourth Test: India win by 5 wickets to claim series 3-1 with one Test remaining
  • UK writer Prof Nitasha Kaul, who was invited by the Congress government in Karnataka for the international conferecne on the Constitution, was detained and deported upon her arrival at Bengaluru airport
  • Haryana INLD chief Nafe Singh Rathee was shot dead in Bahadurgarh in the state after his car was ambushed and sprayed with bullets by suspected gangsters
  • After the Congress left late Ahmad Patel's fief Bharuch in Gujarat for the AAP, his son Faisal Patel has revolted and said that he will contest from the seat
  • BSP implodes as MP Ritesh Pandey joins BJP with 3 more MPS eyeing a switch to the BJP, 2 looking to join the Congress and 1 RLD
  • PM Modi inaugurates Sudarshan Setu, a 2.3km long cable-strayed bridge that connects Okha on the mainland to Beyt Dwarka island in the Arabian Sea off Gujarat coast
India win the Ranchi Test by 5 wickets, take an unbeatable 3-1 lead in the five-match series
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The Economy: Will The Government Grab The Bull By The Horns?

By Sunil Garodia

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.

Is it time to forget the obsession with lowering the fiscal deficit or at least keeping it in check and indulge in fiscal expansion to kick start a faltering economy? Economic prudence would say so. John Maynard Keynes would also nod agreement. But will a government committed to bringing down the fiscal deficit to 3% (when is the question, because the date has been pushed back many times) as per the Fiscal Responsibility and Budget Management Act, 2003 (FRBMA Act) have the courage or the sagacity to do so? We are witnessing a classic chicken and egg syndrome. Will the economy revive if the government starts spending in a big way or will the government spend if its revenue increases? More than the GDP, it is the Gross Fixed Capital Formation (GFCF) that is a good measure of a healthy economy. In India, the GFCF grew by just 4% in the April to June quarter (it grew at 13.3% in the same quarter a year ago). This drastic fall is the true indicator of the problems being faced by the economy. Gross Value Added (GVA) growth in manufacturing also fell to a ridiculous low of 0.6%.

Since the RBI has admitted that the economy is witnessing a soft patch that has turned into a cyclical downswing with several outstanding structural problems thrown in for good measure, the government needs to start spending on infrastructure and other schemes that can revive industries such a iron & steel and cement, among others, with cascading effect on most other sectors. This will put money in the hands of the people and they will start spending to increase demand for goods and services. That will give a boost to manufacturing which will increase the government revenues in the form of taxes and duties. Once the feel-good factor sets in (and in periods of gloom, even a slight improvement can work wonders), the fundamentally strong Indian economy will not take much time to bounce back. 

The government has, in any case, managed to keep the fiscal deficit in check through off-budget financing by transferring many expenditure heads to PSUs. For instance, the Food Corporation of India (FCI) has been asked to bear food subsidies that were earlier a part of the budget. Since the government cannot cut down on revenue expenditure to any effective extent (it cannot stop paying salaries or interest, for instance, and these are the two heads that drain its resources the most), it has to think of other ways. The structural reform of doing away with or cutting down subsidies and doles is the best way to retain money in the hands of the government but no government has the courage to do it as it will be highly unpopular and the opposition will brand it as anti-poor. Raising taxes is also not a good alternative as many sectors feel that the GST rate is already very high.

The government has already got Rs 1.76 lakh crore from the RBI. It is also planning major divestment in some PSUs. But that will not be enough. What it has also got to do is to immediately get out of loss-making concerns like Air India and BSNL. The latter is waiting for the government to approve its plan of offering voluntary retirement to almost half its workforce to reduce its revenue outgo. But since this again is a politically sensitive issue, it can be done only up to a limit. Finance Minister Nirmala Sitharaman had to clarify that bank mergers would not result in the loss of a single job as the bank unions were up in arms as soon as the mergers were announced. But big banks will not be competitive if they are not lean and shed the bloated workforce (and there is no doubt that the PSU banks are heavily overstaffed). Hence, a government that remains afraid of the political fallout will find it hard to find the money without expanding the fiscal deficit. This government has a popular mandate to take hard decisions. The question is: will it bite the bullet?

pic courtesy: cuba journal