Implications of the Economic Survey
The annual Economic Survey usually carries indications of the shape of things to come in India’s Budget. This year’s document crafted by the Union finance ministry was no exception. It indicated in not so many words that not only would the Centre miss its fiscal deficit target for this year, but will continue to run a high deficit in the coming financial year.
A ballooning deficit was of course something that most were expecting, given the fact that the government had to spend far more this year to counteract the effects of Covid and the fact that a shrinking economy could hardly yield much revenues for the state coffers. It is also a given that India will need to continue to spend more in the year ahead on stimulus measures to help industry and the poor and unemployed, and also catalyse growth by increasing spending on new roads, dams and other infrastructure works.
India’s deficit is usually funded by borrowing from within the country. The consequence of the higher fiscal deficit, which economists feel could be over double the target of 3.5% set for this year, is that public debt to GDP ratio, which was about 66-68% for several years, is likely to shoot up beyond the 80% mark. As the Survey authors have rightly reasoned, to pay back the interest burden on such a high debt mountain, the government needs to earn far more.
While selling off a few PSUs and some excess railway land may help the Indian state balance the books this year, on a long-term sustainable basis, the only answer is to push the country’s growth. With a larger economy, India as a nation will be able to earn far more tax revenues, which could be used not only to pay the interest but also reduce the debt pile. This obviously also gives an indicator of the stance that the RBI may take at its monetary policy meeting next week.
Growth would take precedence over concerns over inflation. Whispers to that effect are already out in the press, with talk of the government seeking that the central bank be less strict on inflation targeting. An accommodative monetary policy could reduce interest rates, making it easier for the government to pay back money. However, it is doubtful whether this would spur private sector investment and growth, given the fact that the pandemic’s scars are still visible on India’s industry.