NEW DELHI: The Narendra Modi government, which is being asked to come up with a fiscal stimulus package on the lines of Franklin D Roosevelt’s 1930s ‘New Deal’ by an anxious India Inc, may consider breaching the fiscal deficit target to try and spend its way out of its economic woes.
Policymakers and economists agree that interest rate cuts and policy interventions need to be supplemented by an expenditure stimulus for which the government may need to breach its fiscal deficit target of 3.3 per cent.
“The government needs to front-load expenditure on infrastructure projects, which could lead to a revival of demand,” said Prof. NR Bhanumurthy of the influential think tank National Institute of Public Finance and Policy (NIPFP).
Top finance ministry officials say the only way a stimulus package of the government spending can be funded would have to be by increasing borrowing even as tax collections in a slowing economy are not expected to be too good. The country’s economic growth has slowed down to just 5.8 per cent in January-March 2019, raising alarm. Passenger vehicle sales fell for eight straight months until June, and in May, sales dropped 20.55 per cent — the sharpest fall recorded in 18 years. Volume growth for the FMCG industry similarly hit a low of around 4 per cent.
“Even though our public debt is ballooning, under the circumstances, we do need it (spending stimulus). Some work is already being done, we have front-loaded spending on rural roads and rural housing, but that is not enough to give a boost to the economy … We need to increase capital spending and possibly cut down on revenue expenditure,” said Bhanumurthy, whose think tank advises the government on public finance and is headed by Rathin Roy, member of the PM’s Economic Advisory Council.
Roy has already warned of a structural slowdown and pointed to the possibility of India being stuck in a middle-income trap. Officials said the only way to fund any stimulus package that India’s political leadership may agree to after representations from industry would have come from borrowings, as tax targets would be difficult to meet this year.
Officials said large public sector companies have already been asked to front-load their capital expenditure plans to spur spending. To fund this round of capital expenditure, they have been advised to increasingly tap the foreign bond market. Among others, the government has nudged state-run firms like Indian Oil Corporation (IOCL), Oil India (OIL), and Bharat Petroleum Corporation (BPCL) to increase their external borrowings, both through dollar bond issues and loans. Several PSUs have already taken the foreign currency borrowings route this year.
Plan of action
Large public sector firms have already been asked to front-load their capital expenditure plans to spur spending. To fund this round of capital expenditure, they have been advised to increasingly tap the foreign bond market.