Hope and fear are marching in lockstep. The arrival of the vaccines represents the dawn of hope. Yet, fears about mutations of the virus and how politics, which defines public policy, will mutate loom large across India’s political economy. Political rhetoric propels public expectations and the declaration by Finance Minister Nirmala Sitharaman recently of “a budget which is a budget like never before” will be tested against a billion aspirations.
The challenge of revival and recovery is located in a parade of riveting contrasts. India, it is useful to remember, migrated from slowdown to lockdown. The contrast between the message beamed by stock indices and indices of the real economy are striking to say the least. In the period post the high of 2016-17, growth has slid consistently and stock valuations have risen just as consistently. GDP growth slid from 8-plus per cent to hover at around 4 per cent to a contraction in the wake of the pandemic, while the benchmark Sensex has shot up from around 29,000 points to over 47,000 points.
How has the fall in growth impacted government revenues? In theory, drop in output would result in drop in revenues. That though is not necessarily true in the Indian context. This week, the government informed India that the Goods and Services Tax collections “for December 2020 recorded all time high since implementation of GST”. Even as the economy is in what is called a technical recession, which translates into two quarters of negative growth, GST collections which averaged at around Rs 90,000 crore since August 2017, touched the new high of Rs 1.15,174 crore for the month of December. GST revenues grew even as the economy shrank 7.5 per cent in the July-Sept 2020 period.
It is not just the Dalal Street vs Main Street picture or the GDP vs GST revenues imagery which are curious. Conventional economics postulates a correlation between inflation and interest rates. Consumer Price Inflation, which was under 3 per cent in 2017, has seen a secular rise now touching 7.5 per cent. The RBI’s policy rates though have slid from over 6.5 per cent to 5.15 per cent in 2019 to 4 per cent in 2020. This column has previously highlighted the phenomenon (https://bit.ly/27Savers) affecting savers. Interest rates for depositors with money in a savings account halved to 3 per cent — a 365-day deposit now fetches what the savings account used to.
So, how has a lower cost of money, higher GST revenues served government finances? Not so well even though the weighted average cost of borrowing has dipped from 7.5 plus per cent to now 5.87 per cent for a 10-year bond. The outcome depends not just on the rate of interest but, more critically, the quantum of borrowings. Gross borrowings of Centre and states has gone up from Rs 11.66 lakh crore in 2016-17 to Rs 15.62 lakh crore in 2019-20 — effectively rising from Rs 3,030 crore per day to Rs 4,280 crore per day or Rs 178 crore per hour. The impact is visible in interest costs. In five years, just the interest cost of the Centre rose from Rs 4.80 lakh to Rs 7.08 lakh crore — that is, Rs 1,940 crore per day or Rs 80 crore per hour. This despite the cost of funds coming down!
For sure, there are reasons for many of the contrasts — and some have been normalised in the political discourse. For instance, the buzz in global financial markets has been about the weakening of the dollar post the easy money regime following the stimulus. This has resulted in flows to emerging economies. India has had record inflows for portfolio and foreign direct investment in 2020. Yet, the punters have labelled the rupee among the worst performing currencies.
The explanatory counterfactual is the RBI has bought dollars, released liquidity and added $ 112 billion to its forex reserves. Similarly, portfolio flows helped stock valuations for index stocks even though the broader economy stalled. Higher borrowings and interest costs is essentially the result of higher expenditure. The rise in GST is partly explained by incidence of taxation — a look at prices of diesel and petrol would be instructive.
While there can be explanations for the contrasts, these are indicators of the rising costs of a low growth economy. Ergo re-aligning the pieces to normal constructs of economic theory, so as to balance pain and gain, will be the principal challenge in the design of Budget 2021. It all boils down to finding resources, and the balance sheet doesn’t look pretty with just the Centre’s fiscal deficit at Rs 10.75 lakh crore for the April-November period.
Arguably, anecdotal evidence points to a positive trend and the budget could bet on growth but restoration of its level to sustain current debt to GDP ratio calls for a review of how the government conducts governance. The situation demands a recast of funding and functions — a review of how the government manages its funds, what it must own and not own, what it must do and not do. Clearly Budget 2021 cannot be a business as usual essay.
Author of The Gated Republic, Aadhaar:
A Biometric History of India’s 12 Digit
Revolution, and Accidental India