India’s strained fiscal position makes a heavy, fiscally expansionary policy a difficult proposition, according to Bibek Debroy, chairman of the Prime Minister’s Economic Advisory Council (PMEAC).
As for the next stimulus package, the timing and sequence will be crucial, Debroy observed during a conversation with author and political economy analyst Shankkar Aiyar and TNIE Editorial Director Prabhu Chawla on Express Expressions, a series of web casts with people who matter.
Excerpts:
The IMF has forecast a 10% contraction for the Indian economy this fiscal. How does it look from your standpoint?
In terms of GDP numbers, Q1 of this year was the worst... Q2 was better but it will still be negative (y-o-y), Q3 will be in positive territory, and Q4 will be a bit more positive. So this financial year, I think we will end with a negative real GDP rate of growth... 7-10% or thereabouts. This means the nominal rate of growth will also be pretty close to zero, or outright negative… it has revenue implications for Union and state governments.
A large section of the commentary says we have not done enough on the stimulus front to create demand...
In terms of national income accounting, there can be only four sources of growth: net
exports, consumption, investment, and government expenditure.
Exports, given what has been happening globally, cannot possibly be a major growth driver. Fiscal policy can either have an expenditure or a tax reduction element.
One must realise that the government is not in very good fiscal shape and any borrowing will eventually have to be repaid. If the nominal rate of growth is lower than the rate at which the government is borrowing, then one has a serious problem in terms of servicing that debt.
Also, I need to point out that for indirect taxes, the revenue neutral GST rate should have been increased 17% to give the same kind of revenue. What is the average GST rate today?
It is 11.5%. Given this, does one seriously expect GST rates to be reduced even further? Similarly on the direct tax side, every possible tax reform involves the removal of exemptions, that will involve an actual increase in the effective tax rate.
There is also something that we must hold on to in case of (emergencies), in case there is a vaccine and it needs to be funded, etc.
More importantly, if there is going to be greater expenditure, the timing has to be right. The sequencing that has to be right. The finance minister is on record as saying there will be an additional package. I would interpret that as saying that the timing and the sequencing will have to be right, so that it works.
WATCH
Why is the government afraid of deficit financing?
The reason, as I said, is because the debt has to be repaid. Let me also remind you, that at the end of October, the recommendations of the 15th Finance Commission will be submitted… (and) will
involve a certain amount of fiscal devolution to states. The Union Government has to retain the cushion for this...
If one is looking at an ability to repay debts, another 2% of GDP fiscal leeway is only what is available. I defy anyone to establish for me a credible medium-term fiscal strategy, which involves incremental
expenditure of more than 2% of GDP...
Out of this, remember what I said about GST compensation? The finance commission? The vaccine? etc?... 1% of GDP just gets swallowed up. This remaining 1% has to be timed so that it does not merely lead to inflation.