How the Modi govt plans to push growth

The government plans to raise resources to finance capital spending beyond the Rs 3.10 lakh crore budgeted for 2017-18 through higher borrowing or divestment receipts.

The government is considering increased spending in order to revive the economy and is open to allowing the fiscal deficit to widen beyond its target for the year.

A stimulus package in the range of Rs 40,000-50,000 crore (Rs 400-500 billion) is being discussed in the government, though these figures could not be immediately confirmed.

Back-of-the-envelope calculations show that a Rs 40,000-crore increase in capital spending could lead to a fiscal deficit of 3.5 per cent of the gross domestic product, against the Budget estimate of 3.2 per cent.

Assuming the budgeted total revenue figure for 2017-18 remains constant, for each additional spending of Rs 10,000 crore, the fiscal deficit as a percentage of GDP roughly increases by a little less than 0.1 per cent.

A senior government official said a final view would be taken by Prime Minister Narendra Modi and Finance Minister Arun Jaitley soon.

Earlier this week, Jaitley held a series of meetings with Commerce Minister Suresh Prabhu, Railway Minister Piyush Goyal, NITI Aayog Vice-Chairman Rajiv Kumar and officials from the finance, commerce and railway ministries.

The meetings, Business Standard has learnt, discussed raising resources to finance capital spending beyond the Rs 3.10 lakh crore budgeted for 2017-18 through higher borrowing or divestment receipts.

Officials say that though it is too early to be sure, there are indications that there may be indirect tax revenue shortfall in the first year of the implementation of the goods and services tax.

The meetings also discussed whether Air India’s disinvestment could be completed in 2017-18 and whether the Centre should borrow more from the market.

The gross borrowing target for 2017-18 is Rs 5.8 lakh crore and the divestment target is Rs 72,500 crore (Rs 725 billion), the highest ever.

But earlier indications from the Centre were that Air India’s lengthy privatisation process would not be completed this year.

Besides, non-fiscal stimulus measures, including more infrastructure bonds and bonds to recapitalise banks, were on the agenda.

“Various options to recapitalise banks were discussed. These could be through raising money from the debt market or by the Centre diluting its stake in banks. Privatisation of more state-owned banks is under discussion,” an official said.

The measures to kickstart growth will be presented to Prime Minister Narendra Modi.

An expert committee on FRBM (fiscal responsibility and budget management) had recommended bringing down the fiscal deficit to 2.5 per cent by 2023, and also cap the debt to GDP ratio at 60 per cent.

However, the dissent note in the FRBM report had observed that mindlessly sticking to numerical targets can make a slowdown worse.

The Centre’s capital spending estimate for 2017-18 is 25 per cent higher than the Rs 2.47 lakh crore target of 2016-17 and 11 per cent higher than the revised estimate of Rs 2.80 lakh crore.

The fiscal deficit in April-July was Rs 5.05 lakh crore, about 92 per cent of the 2017-18 budget estimate of Rs 5.46 lakh crore.

This is due to frontloading of expenditure because the Finance Bill 2017 was passed before the beginning of the fiscal year.

GDP growth in April-June declined to 5.7 per cent due to demonetisation and destocking by companies before the implementation of the goods and services tax (GST).

GDP growth is down from 7.9 per cent in April-June 2016-17.

Growth in manufacturing declined to 1.2 per cent during the quarter from 5.3 per cent in January-March.

Mining and quarrying contracted 0.7 per cent  after growing 6.4 per cent in the previous quarter. Agriculture growth lost pace at 2.3 per cent, against 5.2 per cent in the previous quarter.

Photograph: Amit Dave/Reuters