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

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  • Kapil Sibal leaves Congress, fills nomination for Rajya Sabha with SPs backing
  • RBI bans 5 NBFCs as it cracks down on e-lending platforms
  • Hindustan Motors to tie-up with Peugeot to bring out a redesigned version of the iconic Ambassador
  • GST Council to defer rate rejig due to inflation
  • Centre to sell 29.5% in Hindustan Zinc at an expected price of Rs 38000cr
  • Stocks remain negative on Wednesday: Sensex loses 303 points to 53749 and Nifty 99 to 16025
  • IPL: RCB beat LSG by 14 runs and end their dream run. Rajat Patidar scores a brilliant 112. RCB will take on RR to decide who goes through to the finals
  • Delhi Additional district judge Nikhil Chopra says there is no legal right for people seeking to worship deity inside Qutab Minar, says it survived 800 years without worship so "let it survive like that"
  • Punjab chief minister Bhagwant Mann sacks state health minister Vijay Singla over corruption charges. Singla was later arrested by the ACB
  • Protestors burn the house of Andhra minister P Viswaroop and MLA Satish Kumar over renaming of Konaseema district as B R Amberdkar Konaseema
  • Gyanvapi: Varanasi district judge decides to first hear the 'maintainability' plea filed by mosque management
  • Delhivery and Venus Pipes shares list at premium of 10% and 8.7% respectively even when market sentiment was down
  • In a bid to cool edible oil prices, Centre allows duty-free imports of 20 lakh tonnes each of crude sunflower oil and crude palm oil per annum this year and next
  • Centre caps sugar exports to ensure availability of stocks in the domestic markets to cool prices
  • Stock markets get the jitters as RBI signals rate hike and government moves in to control inflation: Sensex tumbles by 236 points to 54052 and Nifty goes down by 89 points to 16125
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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