Plenty of headwinds in way of $5 tn GDP goal. Will govt act quickly enough?

While the rain did its best to derail the plans, the Mint Roundtable, part of the sixth edition of Mint Mutual Fund Conclave held in Mumbai on 26 July, on the state of the economy saw a full house. We were debating the key issues that face the economy with thought leaders in the financial sector and Bibek Debroy, chairman of the Prime Minister’s Economic Advisory Council. It was like a Delhi meets Mumbai kind of an evening. Constrained by Chatham House rules, the finer details of the discussion are not being put in the public domain, but here are the broad areas of discussion.

On Economic Health

Evidence, both statistical and anecdotal, suggests that the economy is slowing down with the levers of growth unable to give the impetus the economy needs. Net exports are slowing and both global and domestic conditions aren’t conducive for a revival. Fiscal constraints make the government unable to increase expenditure to pump prime the economy to the extent needed. Latest data from the National Sample Survey indicates a significant slowdown in consumption too, the one bright spot so far in the economy. Unless measures to encourage private investments and harness household savings are quickly put in place, investments, too, would not be a significant contributor to GDP growth.

With economic variables looking weak, GDP growth rate is likely to be lower at 6.5% in FY20. The participants evaluated various data points to understand the viability of a $5 trillion economy by 2024, and the conclusion was that it was likely to fall short. The sanctity of GDP growth rates was also debated and it was clarified that the confusion is with the GDP deflator that is used to convert the nominal GDP number to the real GDP number and not on the robustness of GDP itself.

The discussion also looked at the constraints in the government’s revenue generation. While the tax revenues of the government have seen some improvement, there is still a lot to be done on indirect and direct taxes towards standardization and bringing down the cost of tax compliance which, in turn, is expected to improve revenue collection. On indirect taxes, the rationalisation of goods and services tax (GST) rates was seen as a priority. But this involved moving up of rates at the lower end along with rates reducing at the upper end and this was the biggest challenge facing the GST Council. On direct taxes, the sticking point to simplify and standardize the tax code seems to be the exemptions which beneficiaries are unwilling to give up.

On non-tax revenues, particularly on monetization of assets through privatization, it was stressed that given that a large part of the value will come from land-holdings of CPSEs (central public sector enterprises), unless the land inventory process is completed, the sale of such assets may not happen. The discussion also highlighted that after revenue is apportioned to states and essential expenses under the seventh schedule of the Indian Constitution, such as health, education and defence, it leaves very little headroom for the government to stimulate the economy.

On Fiscal Health

The roundtable participants agreed that the fiscal numbers did not add up. Given the economic growth numbers, the revenue estimates made by the budget seemed optimistic while there was no clarity on how some of the expenditures would be funded. It led to the conclusion that there may be some cutting of expenses.

The discussion also covered the issue of government of India bonds in international markets. The benefits and drawbacks of rupee-denominated bonds versus foreign currency-denominated ones was debated. The importance of having Indian bonds in emerging market bond indices to attract institutional funds, such as pension funds, into Indian bond markets was pointed out as was the importance of rupee-denominated bonds to establish the rupee as an internationally acceptable currency.

On the way forward

Once the ground realities of the state of the economy was agreed, the discussion turned to what needs to be done. The need for the government to focus on smoothening the process for private investments into infrastructure and other areas where the government was unable to make investments given its fiscal compulsions was stressed. The participants raised the need for the government to create an enabling environment by setting in motion structural reforms, clarity and predictability in policy and processes, efficiency in allocation risk and resources and ensuring an adequate return on capital. They also placed emphasis on job creation and skill development in a fast-changing global economic order and for clear policies for the same.

The need for support to the capital market through well-considered regulations that took on board the feedback of market participants was pointed out as essential for the markets to play a greater role in funding economic activity.

India’s economy seems to be facing headwinds and how quickly policymakers are able to provide the policy push remains to be seen. The ask from the private sector for stepping in seems to be on a framework that provides ease of business and predictability. Given that the government itself is not in a fiscal position to make investments that the economy requires, it may be time to redirect its energies on providing the environment to encourage private sector investments.