The fifth bi-monthly monetary policy statement on 5 December was most reassuring. The Monetary Policy Committee wisely took a pause after five consecutive repo rate cuts aggregating to 1.35 percentage points. The reasons given wholly justified the pause. The transmission of monetary easing to bank lending rates on fresh rupee loans has traversed only one-third of the policy rate distance so far; rigid rates on small savings instruments remain an impediment to bank deposit rate cuts, and, as the policy statement delicately puts it, the Monetary Policy Framework awaits better insight on the fiscal stance of the government.

The finance minister has repeatedly said that the fiscal deficit will be held at the announced budgeted level of 3.3% of gross domestic product (GDP). Adherence to the Centre’s budgeted fiscal deficit will not be a virtue at this time. What it will do, at a time of expenditure pressures and when revenue is slowing because growth is slowing, is that there will be expenditure deferment. Construction projects tend to be large and, therefore, confer a significant deferment benefit. I have written before on how deferment of payments due to Infrastructure Leasing and Financial Services (IL&FS) for road building precipitated its default on bank loans in September 2018, which led to the non-banking financial companies contagion we continue to suffer.

A recent statement by the finance minister promises a major infrastructure expenditure thrust to be announced in mid-December. Construction companies will come forward only if they are sure they will receive their payments on time. This can happen only if there is continual verification of the work as it progresses. The final issue of a completion certificate must be time-barred and precede invoice submission.

This is particularly important after the goods and services tax (GST), which is payable by the contractor on an accrual basis at the time the invoice is submitted. Earlier, service tax was not leviable on construction contracts with the government, but now GST is. So, as GST is transmitted in advance by the contractor to the government before he actually receives it in cash from the buyer (the government), it stands to reason that all procedures, such as verification, must be done before this, and the time interval to final payment must carry a stipulated cap (no longer than six months). Had these been in place, the IL&FS situation might have been prevented. In procurement contracts, once again, time-barred verification for all departments can be done by a technical team of the Indian Statistical Service trained in statistical quality control.

In a countercyclical fiscal expansion, Keynes famously suggested that the type of expenditure did not matter, but in our case it does. The incremental rupee of fiscal expenditure varies in its multiplier impact according to the propensity to spend of recipients—and, in particular, to spend on domestically produced goods and services. Expenditure on construction of roads and other infrastructure (either primary or maintenance) puts money in the hands of labourers, who will spend for survival in their immediate vicinity and remit some home. Some of it will be spent there too. The multiplier impact on domestic demand will be higher than if equivalent incremental income went to population segments with higher propensities to import.

Where expenditure is transferred to other agents for execution, such as state governments or institutions of various kinds, deferments are done on alleged failures to adhere to conditionalities. The Nirbhaya Fund budgetary allocation has been under-utilized for these reasons, with the gruesome consequences we see every day. Such schemes typically carry a complex set of qualifying conditions with the ostensible aim of preventing misuse, but these very conditions can be used as an instrument of destruction.

Another deferment alternative when elections change the party in power (at state level, so far) is outright termination of contracts signed by prior governments. Independent power producers are among those adversely affected by this practice in recent years. Of course, if the new government institutes new expenditure avenues in the space opened up, there will be no reduction in the fiscal deficit, other things being equal.

The good news is that there is evidence of simplification of complex conditionalities surrounding recent schemes, such as the fiscal package for completion of stalled housing projects, first announced on 14 September 2019. As initially announced, a qualifying project had to have positive net worth, not be in default or referred to bankruptcy, and with achieved completion of more than 60 %.

The delay in operationalizing the scheme in itself flipped many potentially qualifying projects into bankruptcy. The final cabinet approval on 6 November simplified qualifications to just positive net worth and registration under the Real Estate Regulation Act.

Thursday’s monetary policy announcement refers to impediments to investment. In the latest edition of the World Bank’s Ease of Doing Business, India’s rise to rank 63 was rightly celebrated. What escaped attention was that of its 10 constituent indicators, India had a rank of 163 out of 190 countries in contract enforcement, and the government itself has been an erring party. This is among the factors that have reduced the economy’s growth rate and it will continue to stall corrective efforts, unless the underlying fundamentals are addressed.

The Monetary Policy Committee statement was wise to have highlighted these matters.

Indira Rajaraman is an economist.

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