Originally Published 2019-08-28 06:36:58 Published on Aug 28, 2019
By transferring Rs 1.76 lakh crore from the RBI’s surplus funds, the government is determined to meet its fiscal deficit target of 3.3 per cent of the GDP because doing that seems to be its top priority, rather than spending more on infrastructure, welfare programmes and centrally sponsored development schemes.
Meeting the fiscal deficit target somehow

According to Nobel-laureate economist Paul Krugman, “Textbook economics says that governments should run deficits in times of high unemployment.” He criticises Germany’s spending cuts and austerity measures, which it not only practised on its own economy but also forced nations in southern Europe to undertake.

In other words, fiscal deficits (the difference between the government’s total tax revenue and its total expenditure) should be allowed to widen in order to give a boost to the economy in times of a downturn. Is the Modi government making the same mistake of undertaking austerity measures? By transferring Rs 1.76 lakh crore from the Reserve Bank of India’s (RBI’s) surplus funds, it is determined to meet its fiscal deficit target of 3.3 per cent of the GDP because doing that seems to be its top priority, rather than spending more on infrastructure, welfare programmes and centrally sponsored development schemes.

Is the government on the right course in cutting down public expenditure and going all out to meet the fiscal deficit when consumer demand is ebbing and unemployment rising? Perhaps, it is under pressure to do so because the tax collections under GST have fallen short of the target and it is worried about downgrades from credit rating agencies.

According to the Comptroller and Accountant-General’s report, growth in taxes slowed down to 5.80 per cent in 2017-18 as compared to 21.33 per cent during 2016-17. The Centre’s revenue from GST declined by 10 per cent in 2017-18 compared to revenue of subsumed taxes in 2016-17. This has been due to rampant tax evasion under GST. As for direct taxes, according to the International Monetary Fund (IMF), growth in collection up to mid-August has been 4.69 per cent as against the full year’s target of 17.1 per cent.

To prop up consumer demand, the government and the RBI have resorted to monetary policy and repo rate cuts which have not yet translated into easier loans for the MSME sector. Many sops were recently given to the MSMEs. The other sectors that are not looking up are farming and the service sectors.

From all accounts, the government is cutting its revenue expenditure which is meant for the normal running of government departments —various services like health and education, rural development, interest charges on debt incurred on government and subsidies. The government's revenue expenditure, according to one report, is now targeted to grow only by 6 per cent which is much lower than the 22 per cent growth projected for the full year.

Capital expenditure which includes purchases of land, machinery, buildings, investment in shares, loans by the Central government to state governments, repayment of loans — in short various asset-creation activities — has also been pruned down.

Cutting down on revenue and capital expenditures in times when demand is slowing down and consumer confidence is low could be a big mistake. Increase in public expenditure is important for building confidence among businesses and consumers. There is a fear today that jobs are being shed and laid-off people are finding it difficult to get alternative employment.

Automobiles, tractors and two-wheelers have lost 2.3 lakh jobs and according to the Society of Indian Automobile Manufacturers (SIAM), 10 lakh jobs have been hit in the auto component manufacturing industries. In the real estate sector, there are unsold inventories for 42 months. Even biscuit-making factories are laying off 10,000 jobs to combat the slow growth in rural demand due to stagnant wages.

The government has to create more jobs by raising public expenditure in important infrastructural projects that would boost the construction industry. It should also put in place a social safety net to cushion the impact of the economic slowdown.

But the government is, in fact, cutting down on centrally sponsored schemes and has asked all Central ministries from taking up new schemes or projects without obtaining prior clearance from the Department of Expenditure. It has ruled out fresh expenditure on any new scheme a ministry may want to implement.

Similarly, the Finance Ministry has asked all Central ministries to actively consider merging and restructuring schemes or projects that have proved to be redundant or ineffective. While it is true that there has been a proliferation of centrally sponsored schemes which rendered them quite ineffective due to constant overlap, cutting down welfare schemes may give wrong signals.

In 2016, the total number of Central schemes was reduced to 300 and the pruning is being continued vigorously. Many essential schemes that directly benefit the poor should not be scrapped.

The 15th Finance Commission has been reportedly asked to eliminate a number of centrally sponsored schemes, specially in the area of welfare, agriculture, public health, water supply and irrigation, fisheries and social justice. This is not yet confirmed as the report of the commission is due in a couple of months.

The global scenario is not very encouraging, with the EU facing a slowdown and many ASEAN countries feeling the strain of the trade dispute between the US and China, which has disrupted their industrial production, supply chains and exports. Thailand is facing a severe slowdown and has announced a $10-billion stimulus package.

To revive domestic demand when global demand is shrinking is essential under the present circumstances. It is important that people have the spending power.

In this context, Rahul Gandhi’s ‘nyaya’ scheme (Nyuntam Aay Yojna), the blueprint of which had been worked upon by a number of eminent economists, deserves a second look. If people who are poor are given Rs 6,000 in hand, their consumption level will rise. It will cost only 1.7 per cent of the GDP. Though this minimum income scheme for the poor may cause fiscal slippage, the government would have ensured that the lives of the poor are protected.

Austerity caused much hardship in some Eurozone countries when they faced huge debts after the global financial crisis of 2008. Portugal, Ireland, Greece, Cyprus and Spain undertook severe budgetary cuts and it was only through a massive rescue package from the IMF, European Central Bank and European Commission that economic revival was made possible.

India’s balance of payments is not so worrisome and inflation is below the targeted rate. So why this belt-tightening exercise?

This commentary originally appeared in The Tribune

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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