Does the government have the resources to frame an effective stimulus package for India’s economy?

Even as some economists have been suggesting a fiscal stimulus package to boost India’s slowing economy, NITI Aayog Vice Chairman Rajiv Kumar on Wednesday was quoted as saying that he supported increased government spending in key sectors with the aim of galvanising consumer demand. Kumar told Reuters that there would be no harm in relaxing the fiscal deficit target of 3.2% of the GDP set in the budget for this year if it helped the economy. The fiscal deficit refers to government spending in excess of its revenues.

But is the government in a position to put together an effective package?

Suyash Rai, a senior consultant at the National Institute of Public Finance and Policy, a research institution, said that the fiscal deficit target set by each government at the time of presenting the Budget is usually pegged to its expectation of growth rates during that year. If the economy does not grow fast enough, the fiscal deficit target would have to come down.

Rai explained this with the example of current numbers. While preparing the Budget this year, the government expected the economy to grow by around 11% in nominal terms –
that is, without taking inflation into account. However, the economy grew by only 9.3% in the first quarter.

A high fiscal deficit could have several adverse effects, economists warn. If a government spends more than the revenue it collects, it must borrow money from the market. But large borrowings increase interest rates for private investors and crowd out private investment.

Already, the government’s ability to frame an effective stimulus package seems limited, consider the data on how and where the administration has spent its resources this year and how much revenue it is likely collect, observers say. This was reinforced on Tuesday with news that revenues collected by way of the Goods and Services Tax were just a little lower in August than they were in July.

Spending too fast

As per the latest data, the government has already spent more than Rs 5 lakh crore over and above its total revenue receipts by July. The government’s target for the fiscal year ending March 2018 was to limit fiscal deficit to Rs 5.46 lakh crore. But in the first four months, it has already spent 92.4% of the amount it intended to spend in the entire year. Last year, by this point, 73.7% of the fiscal deficit target had been reached.

Much of the fiscal deficit has arisen from soaring revenue expenditure, such as on salaries of employees, interest payments and pensions. For instance, the government spent Rs 7.13 lakh crore in revenue expenditure, on items such as salaries of employees, interest payments and pensions by July 2017. This is 38.8% of the total budget of Rs 18.37 lakh crore for the whole year. In comparison, 33.8% of the budgeted revenue expenditure was spent by July last year.

Such revenue expenditure contributes less to cycles of economic growth than capital expenditure, which makes long-term investments in the economy, such as putting money in big projects and funding infrastructure under various ministries. This helps create jobs and further income growth. Capital expenditure in July stood at 30.8% of the allocated budget for the full year. In the corresponding period last year, the figure stood at 28.9%.

It is important to note that this year, the Union Budget was advanced by almost a month. It was presented on February 1 instead of February 29 as had been the practice. This enabled the government to spend higher amounts in the first quarter of the financial year starting April.

This “front-loading” of expenditure means that the government spent more money early in the year to discharge its liabilities even as it is yet to receive money in the form of tax and non-tax revenues from disinvestment, spectrum auctions and such avenues.

Depleting coffers

A scrutiny of this year’s Budget makes it clear that, political rhetoric aside, the government did not actually expect its revenues to increase substantially. The government gets revenues from tax and non-tax avenues. Tax receipts include income tax, wealth tax and corporation tax. Non-tax receipts include disinvestment and dividends from entities such as the Reserve Bank of India or the sale of national assets like the rights to use telecom spectrum.

In the Budget for this financial year, the government actually provided for a decrease in non-tax revenues by Rs 46,013 crore, about 13% less than what it earned in 2016-’17 as per the revised estimates of the Budget. This implies a realistic target for disinvestment of government-owned companies and lower expectations from the sale of additional spectrum. For instance, the government had not talked about selling Air India by the time the Budget was presented and now even a partial sale looks out of question in the short run. Last year, the government had received Rs 70,970 crore in non-tax revenue in August alone.

Tax-based revenues for 2017-’18 too have been budgeted for a lower than expected growth rate. This seems at odds with the enthusiasm with which the government has spoken of achieving high economic growth, especially with its demonetisation decision in November and the implementation of the Goods and Services Tax in July. The government expects to collect Rs 12 lakh crore in tax revenues this year, 12.7% more than last year. By comparison, tax revenues had grown by 15.36% last year without GST and demonetisation.

The government did plan for an almost 25% increase in income tax collection, something that several economists claim is unlikely to be achieved after demonetisation. “We will be lucky to get a 15% increase in personal income taxes,” said Pronab Sen, Country Director, International Growth Centre. “The government is very bullish on tax collections but it’s all up in the air because of the GST where a lot of people have claimed refunds and it remains to be seen where the tax numbers finally come to rest.”

Tax collections are directly dependent on economic growth as people are likely to pay more taxes when their incomes rise. If the economy doesn’t grow fast enough, Sen added, the fiscal deficit will only widen.

Economic implications

If revenues are not on target, it will hamper the government’s ability to frame a stimulus package. Rai of the National Institute of Public Finance and Policy argued that a small package may not be adequate to jumpstart India’s Rs 150 lakh crore economy. On the other hand, a bigger stimulus package could undo the progress on fiscal consolidation to reduce the deficit. “We need a fiscal stimulus that’s big enough to make an impact but it needs careful planning to ensure that it is not just revenue expenditure that goes waste and doesn’t build capacity,” he said.