Managing the stimulus | The Indian Express

Managing the stimulus | The Indian Express

Written by Neelkanth Mishra |Updated: February 5, 2019 1:26:58 am

<div id="stcpDiv">The writer is the India Equity Strategist for Credit Suisse.</div>

Managing the stimulus

The income transfer scheme was the highlight of the budget. But its success will need deft manoeuvring.

It’s not all rosy, however. In the current financial year, extra-budgetary spending was Rs 1.4 trillion higher than what had been budgeted. (By Suvajit Dey)

Like in each of the previous two years, the run-up to the budget this year was rife with fears of significant fiscal slippage if the government caved in to political compulsions. And like in prior years, these fears turned out to be exaggerated. The decline in fiscal deficit ratios has indeed stalled, and at nearly 6 per cent, India continues to have one of the highest general government (that is, states plus Centre) deficits globally. But an important message was that the downward glide path of fiscal deficits was not disrupted.

A measure of “crowding out” is government borrowing from bond markets as a share of incremental deposits in the banking system: This ratio is now down to 33 per cent as the net bond issuance budgeted for the next financial year is unchanged from levels seen eight years back, a period in which the economy has grown substantially. That is, the government’s excess spending, funded through borrowings, is now appropriating a smaller part of the financial savings and leaving more for the private sector.

It’s not all rosy, however. In the current financial year, extra-budgetary spending was Rs 1.4 trillion higher than what had been budgeted. Ninety per cent of that amount was from the Food Corporation of India. While higher inventory holding likely explains a large part of this Rs 1.2 trillion increase, one wonders if some unfunded food subsidy may have contributed too.

Governments also have this tendency to give aggressive tax collection targets that make the deficit appear low, but then later in the year are forced to make course corrections. Are the tax targets for the next year too aggressive? They appear to be somewhat stretched, but achievable. The economic growth estimate of 11.5 per cent, taking the GDP to Rs 210 trillion, may be slightly optimistic, given how weak inflation has been in the past several months, even if the government’s consumption stimulus shores up activity levels. Budgeted growth in direct tax collections at 15 per cent appears high, but is lower than what has been achieved over the past two years and thus more credible, given the significant widening of the tax base, and some recovery in corporate earnings.

The 18 per cent estimated growth for GST collections seems to assume an improvement in compliance. As government functionaries have frequently stated in the last few quarters, GST collections thus far have been nearly completely voluntary. There has been very little enforcement and follow-up. Post elections, the government may re-start the move towards e-way bill or invoice-matching, and also permit tax officials to question the accuracy of the self-assessments made by entities.

The highlight of the budget was the Rs 750 billion income transfer scheme for farmers. Even though this was widely anticipated, this is a policy innovation whose impact is hard to model. Most income transfer schemes so far have been experiments on small sets of people in particular villages or townships. The impact of a scheme with 117 million farmland owners is likely to be significantly different.