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Budget: How the govt can put the economy back on track by spending big

·4-min read

With private consumption and investments not kicking off due to various reasons including the pandemic induced effects, all eyes are on government spending to bail out the economy.

The Indian economy was facing similar growth pressures during 2008-09 in the aftermath of the Global Financial Crisis. However, thanks to the fiscal stimulus rolled out, we emerged unscathed from the crisis.

The fiscal deficit estimated during the budget presented for 2009-10 was 6.8% of GDP. Most experts agree that the government should spend more without being constrained by its FRBM (Fiscal Responsibility and Budget Management) targets.

With this year’s fiscal deficit expected to be around 7%-8% of GDP, the government should propose a plan to bring it down to 3% of GDP by 2025 due to the unprecedented situation.

Every 1% relaxation in fiscal deficit target provides Rs. 2 lakh crore of funds to the central government to spend and provide a boost to the economy.

Top 5 focus areas of spending

Infrastructure creation, healthcare, rural employment generation, urban housing and subsidized ration for the poor should be the key focus areas of government.

Government spending as a percentage of GDP in India was 13% in the financial year 2019-20. This is the lowest among the BRICS countries.

COVID-19 has put in focus the precarious healthcare situation in our country. We have only 5 beds per 10,000 population against a benchmark of 21 for developing countries. Our spend on health is just 1.5% of GDP, which needs to be doubled to 3% by 2025.

A universal vaccination program for the population could cost Rs 52,000 crore, at the rate of Rs 200 per vaccine per dose. This is 80% of our current health budget.

The government had increased NREGA allocation to Rs. 1.05 lakh crore to provide relief to the poor and migrant workers. As per reports around half to two-thirds of them have returned to the cities.

However, many of these workers are still looking out for jobs. The government should without reducing the NREGA allocation, include the urban poor in the scheme.

The migrant crisis has also brought to the fore the poor situation of the workers in cities. They live in shanties, slums with poor sanitation and lack of access to basic services.

The government is encouraging realtors to focus on affordable housing and has also announced tax breaks for individuals purchasing these properties. There is now a growing clamour for the government to build affordable housing so as to provide affordable renting options for the urban poor.

The government should continue with the provision of free ration for the poor for at-least 1 / 2 more quarters. With the vaccination drive kicking in, economic activity is expected to reach pre-COVID levels in the next 3 to 6 months. It will lead to destocking at FCI warehouses, reduce costs of storing, pilferage / wastage and also create space for the new buying season.

The biggest area the government needs to focus on is infrastructure as such spending has a multiplier effect on the economy and leads to job creation. For example, our farming infra is in shambles and we need heavy lifting in terms of creating a network of cold chains across the country.

The government had proposed to spend more than Rs 100 lakh crore during the period 2020-25 on the National Infrastructure Pipeline.

Investment in infrastructure is necessary for the economy, as power shortages, inadequate transport and poor connectivity affect overall growth performance, as per the Economic Survey for 2019-20.

How does the government fund this spending?

The most important source could be disinvestments. The government’s motto has been maximum governance, minimum government. Though the target for 2020-21 is likely to be missed, the government should focus on removing bottlenecks in the process.

Monetisation of government / PSU land bank, use of OFS route to take advantage of new market highs could be some options available to the government. However, it should refrain from the lazy economics of raising taxes for individuals.

The government also needs to encourage foreign direct investment in infrastructure as funding Rs. 20 lakh crore per annum for NIP projects is going to be difficult in these times. The setting up of a development finance institution to fund infrastructure projects is on the anvil.

Monetizing the deficit (printing more money to fund expenditure vis-a-vis borrowing) is another option available in these circumstances. However, it comes with side effects.

Banks are flush with liquidity, however low credit offtake is forcing it to remain unproductive. Government should raise infra bonds or issue medium to long term savings schemes by offering higher interest rates.

All eyes are now on Nirmala Sitharaman. Can she provide the stimuli required to rejuvenate the economy? Let’s wait for 1st of February...


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