A mid-year assessment that does not surprise

The mid-year economic analysis was tabled in Parliament recently. Part of the formal arrangement by which the executive — in this case, the Finance Ministry — briefs the Parliament at regular intervals. This year’s report has the stamp of the new chief economic advisor, Arvind Subramanian. The Analysis is significant because it covers a reasonable period of the BJP rule. How far have the promises been kept?

Positive side

On the positive side, there can be no doubt that the economy is recovering. A combination of external and domestic factors has helped. The BJP government is seen by many to be lucky — the unexpected drop in petroleum prices is certainly a booster. Other commodity prices are also down and India’s inflation rates have come down dramatically. The government has taken some steps at reviving the economy and to bring down food inflation. Its thrust on inclusive growth through financial inclusion is noteworthy.

Yet lots remain to be done. Although the analysis does not say so, the government has promised much more than what it can reasonably deliver. The economy is poised to grow by 5.5 per cent. The significance of that number is in the fact that it might finally herald a period of at least modest growth, higher than the sub-5 per cent rate clocked in the previous two years.

The mid-year analysis focuses on India’s fiscal situation. The target of 4.1 percent set by the previous UPA government is ambitious but the government remains committed to achieving it.

Fiscal situation

The fiscal situation at the midpoint is far from happy. There is an expected shortfall in the revenue to the extent of Rs. one lakh crore compared to the last budget. Aggregate revenue has been growing at about 10 per cent below budget estimates despite a recovery of sorts in the growth of the GDP.

The analysis has debunked the public private partnership, once touted as the most appropriate model for the vital infrastructure projects.

The private sector is steeped in debt and the private promoters are hardly in a position to get the stalled projects moving. Without reviving the projects there cannot be any investment revival. Bankers have long ago found the PPP model unviable. But the mid-year report is the first official report to categorise them as failures that they are.

Arising from the above is the main message of the mid-year analysis — that public investment ought to be relied upon to spur economic growth, not in replacement of the private sector, but to complement it. This again is hardly new. Several committees on infrastructure investment — the Rakesh Mohan report (November 2010) comes to mind, but there are others — have assigned the primary role to public investment which in turn is expected to crowd in private investment.

For that to happen, the government must provide funds to projects on a much larger scale than what has been possible so far. Given the state of public finance, that will be a stupendous task.

A commitment to maintain the fiscal deficit target implies fiscal compression — cutting down on not only non-essential expenditure but on development expenditure. This is a dilemma all finance ministers have been facing recently.

Unless the government steps up investment, growth gets derailed. But adherence to an ambitious fiscal road map means lesser public expenditure. Obviously the government has to find a mean between the two divergent tasks.

Window dressing of government finance is not new — the UPA government was faulted on a number of grounds. It took credit for revenue receipts accruing in the next financial year and pushing expenditure items including subsidies to the next financial year and so on. But the NDA government has not been unaware of these.

In fact, it is equally guilty, for instance for an over ambitious estimation of tax receipts. The results are there for everyone to see,

Disinvestment target

Accelerating the disinvestment programme to partly make up for the shortfall in receipts is theoretically an attractive proposition.

In July, while presenting the full budget, Mr. Jaitley raised the target for the current year to over Rs.58,000 crore. With just three months to go there is only one stake sale — that of SAIL — to show. That mopped up Rs.1,700 crore, impressive for one transaction but way below what is needed.

In any case, the public sector sale programme cannot be used to bridge fiscal deficits alone. It has several other objectives such as empowering the unit as well retail investors.

None of these can be achieved when the government is in a hurry and focussed on just revenue.