(Photo: Pradeep Gaur/Mint)
(Photo: Pradeep Gaur/Mint)

Opinion | A wasted opportunity to set the economy’s sights on $5 trillion

Sitharaman appeared rather tentative about the target, mentioning it in her speech but sidestepping the 2024-25 deadline

What has finance minister Nirmala Sitharaman, with $500 billion under her control to spend, done to put the 5th largest economy on the road to becoming a $5 trillion-economy in the next 5 years? Precious little. Barring the noise, there is nothing in the numbers or nuances of the budget that will help achieve the ambitious target set out by the Prime Minister. It is a business-as-usual budget at best, and an advertorial budget at worst.

If anything, the speech was not one of assertive endorsement of the target; rather, it signalled passive acquiescence. Indeed, in her speech, Sitharaman was a bit guarded in taking ownership of the $5 trillion-economy target. She mentioned achieving it “in a few years", but side-stepped the deadline of 2024-25.

To describe it in the mood of the World Cup, Sitharaman batted rather tentatively to get to the $5 trillion target score. She seemed to be batting for a draw on the 5th day of a match. She ought to have played a test match, but like five one-day matches. This would have entailed combining the strategy, style and stability of a test match with the plan, performance and pressure of one-day cricket. In other words, combining a medium-term strategy with short-term performance. A great opportunity has been wasted.

The Economic Survey seems to have stipulated 12% as the required nominal gross domestic product (GDP) growth run rate, with 8% real growth and 4% inflation. This can be very misleading. For one, it is a “derived run rate". Two, at the moment, the economy is on a turning, if not treacherous, track. A decelerating real economy, a stretched fisc, an ineffective monetary policy, an undercapitalized banking sector, and a troubled financial sector are not exactly the enabling conditions for growth. All this in the backdrop of a weakening global outlook. Three, the required run rate, if any, should be for expenditure, not GDP.

The single-biggest negative of this budget is that it keeps the expenditure-to-GDP ratio constant at around 13%. This has to go up to 18% over the next four budgets. Within this, it is equally important that gross fixed capital formation doubles from its existing levels.

To be fair, to some extent the composition issue has been addressed. The important point is that while continuing what has obviously worked, social spending now has a much higher capital and material intensity, and a high wage income component, which will spur consumption and investment demand. A good example of this is the allocation of 1.95 trillion for housing. Compared to the transfer payment form of social spending, this has far superior macroeconomic implications.

Rather than peg the fiscal deficit at a mythical 3.3%, it would have made more sense to increase capital expenditure, which would have pushed the rate of investment above the savings rate. This would have got the output to rise so as to calibrate savings and investment. Meanwhile, recourse to external borrowing in such a situation would have been a risk worth taking. As it stands now, with the fiscal deficit high on the back of non-capital expenditure, it is a dangerous proposition.

The ideal way to go about helping the economy on its path to becoming a $5 trillion powerhouse would have been through multi-year budgeting till 2024 based on a multi-year strategic agenda, or at least through a clearly articulated medium-term expenditure framework. The introduction of a medium-term budget framework is relevant not only because investment expenditure is needed, but also because the Union budget is now essentially an expenditure budget. It would have also integrated the public financial management system with the budgetary process.

In doing so, the seemingly audacious target would not have looked out of reach. If a temporal view is taken, between 2000 and 2006, GDP doubled from $476 billion to $949 billion. In fact, on an average, GDP has doubled every seven and a half years. Now, it is expected to increase from $2.75 trillion to $5 trillion, less than double in five years.

Even if the $5 trillion GDP is achieved by 2024-25, it will mean just 10% growth in per capita income from $2,008 in 2018 to $3,571 in 2024. Assuming an average inflation of 4%, the real rise is just about 6%. For the record, between 1974 and 1979, per capita income doubled from $163 to $224. Same was the case between 1998 and 2005.

So what does the $5 trillion target mean in budgetary terms? On a business-as-usual basis, the increase till 2024 would translate into a hike of about 30% in total expenditure. At that level, maintaining a fiscal deficit of 4% of GDP would require a steep 60% increase in revenue. But this incremental budgetary arithmetic changes in the context of an important statement made by the Prime Minister in his meeting with chief ministers at NITI Aayog—that states have to contribute. It also fits into the framework of former finance minister Arun Jaitley, who made the Union budget a union of state budgets. When the combined revenues of all states are added, the required increase is just about 30%. Unfortunately, states did not find even a mention in the speech. Far from it, the government has imposed additional duties. This not only violates the spirit of the good and services tax, but also pinches states in terms of devolution of revenue. Taking the Centre and states together, the road map to a $5 trillion economy is something simple and tangible: In order to double GDP in five years, you need to double investment in three years.

Haseeb A. Drabu is former finance minister of Jammu & Kashmir

Close