In the budget this year, the Modi Government announced that it plans to spend about Rs 30 lakh crore in the fiscal year 2020-21. This was to be financed by a combination of income and loans. The government's total earnings - from taxes, tolls, fees, dividends and interest earnings - was expected to be about Rs 20 lakh crore. That left a hole of Rs 10 lakh crore to be filled. The Modi Government planned to borrow almost 80 percent of that amount. The remaining 20 percent, a shade above Rs 2 lakh crore, was to be raised by selling shares in government companies.
And then, COVID happened.
The economy collapsed. People stopped buying things, factories were locked down. Consequently, tax revenues dropped by 32 percent in the first quarter. CMIE's surveys tell us that white-collared salaried jobs have taken the biggest hit during the lockdown. Many more have taken pay cuts or have not got increments. These are people who pay income tax, which makes up nearly a quarter of the government's total tax revenues. If they have lost their jobs or are earning less, the government's income tax receipts or earnings are also going to take a big hit.
Corporate taxes, which make up 28 percent of total tax revenues, dropped by a whopping 79 percent in the first quarter. The second quarter was better with the economy opening up again for business after the lockdown, but total corporate tax collections till mid-September were 24 percent lower than last year. Contrast that to the fact that the government expected a 12 percent growth in corporate tax earnings this fiscal.
The Modi government was banking on raising big money by selling some stake in the insurance giant LIC. Latest reports suggest that transaction is going to "spill-over" to next fiscal. That means even the Rs 2.1 lakh crore disinvestment target is unlikely to be met.
If the government's total revenue drops by 5 percent compared to 2019-20 and it manages to raise just half of what it planned by selling PSU shares, then it will be able to raise just Rs 18.7 lakh crore this year, instead of the planned Rs 22.5 lakh crore. If it spends exactly according to plan, the government will need to borrow Rs 11.7 lakh crore to finance its fiscal deficit.
Economists have predicted that the total amount of goods and services produced in India this fiscal will be about 10 percent less than last year. In money terms, if inflation is 5 percent, India's total income will contract by 5 percent. That means our GDP in current prices will drop to about Rs 193 lakh crore in this fiscal. A borrowing of Rs 11.7 lakh crore works out to a fiscal deficit of 6 percent of GDP, as opposed to the 3.5 percent that was targeted in the budget this year.
That means that even if the government doesn't spend a penny more than what it had planned, it would still end up with a massive fiscal deficit. This is what is driving the Modi sarkar's fear of providing a substantial fiscal stimulus. This is also why each time the government gives with one hand, it takes away with the other. If it has given about Rs 2 lakh crore in 'fiscal' stimulus, it has also asked government departments to spend less than their budgets. If it is spending some money in the form of LTA encashment and advances to government employees, it has also frozen the Dearness Allowance hike that they were meant to get this year.
The problem is that India's economy was facing a severe demand crunch well before COVID infected it. Even last year, a majority of economists were saying that only increased government expenditure can revive India's economy. This is doubly true now after COVID has wiped out incomes of businesses and consumers.
This is the dilemma facing the Modi Government right now. If it doesn't spend more, the economy won't revive. If the economy does not revive, no one will pay taxes or buy shares in government companies. That will cause a bigger decline in the government's revenue receipts, further widening its fiscal deficit. The fiscal deficit will look even bigger when compared to the GDP because that will contract even more if the government doesn't spend. This is what textbooks call a vicious cycle.
Paradoxically, higher government spending could well help control the fiscal deficit. For that, the government has to target its spending towards large-scale job creation. The government says that there are about 60 districts in seven states that have been most badly affected by COVID. Other estimates suggest that the vulnerable districts are 110. That leaves over 600 districts, across India, where economic activity can start on a war-footing. These are also likely to be the less developed districts that will benefit from large-scale government infrastructure spending, which can also generate millions of jobs.
The government can give special monetary grants to companies that hire more people. It can create a fund for labour-intensive small-scale industries which can produce goods for mass-p consumption. It can give a short-term profit guarantee to private sector players to encourage them to invest in job-creating projects.
In short, it can direct its additional spends on creating jobs and increasing profit margins. This is what will help increase demand for all kinds of goods and services - from biscuits to data packs and cement to heavy machines. If people and companies earn more, they will pay more income and corporate taxes. If they buy more, they will pay more in GST and other direct taxes. And if investments revive, people will have more confidence in buying PSU shares, helping the government meet its disinvestment target. This is what textbooks call a virtuous cycle.
It is understandable that the Modi Government is nervous about spending, especially because any increase in public debt might invite rating downgrades. However, it appears that the government is being overly cautious. One big rating agency, Moody's, said recently that India's fiscal stimulus has been too little, and it will have negligible impact on growth. In fact, Moody's has pointed out that other countries at the same rating level as India spent twice their GDP to stimulate their economies.That suggests that even international rating agencies, who are notorious fiscal fundamentalists, believe India has some leeway to spend.
The positive sign is that even fiscal hawks in the government have started talking about increasing government spending. But the time for talk is over. If the government doesn't spend immediately, India's economy is in great danger of stagnating for years to come.
(Aunindyo Chakravarty was Senior Managing Editor of NDTV's Hindi and Business news channels.)
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