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Photo: Ramesh Pathania/Mint
Photo: Ramesh Pathania/Mint

Opinion | The big fiscal stimulus that could have been

It’s a big-spend budget alright. It resorts to a legal escape clause on the fiscal deficit to address an economic exigency. Justifiably so. But whether it’ll revive growth is unclear

That our economy needed a heave out of its slump was not in doubt, and that is what finance minister Nirmala Sitharaman’s second budget seems to be aimed at, even if she did not explicitly say so in her speech. Unlike July’s effort, this one acquits itself well on its recognition of the need for enhanced public spending. The same, however, cannot be said of its focus. No matter how you slice and dice its outlays, their impact on economic growth would appear to vary from moderate to patchy in the near term. A fiscal stimulus for 2020-21 mounted on the back of government spending could have been calibrated to combine instant succour with investments that generate jobs and multiply money most effectively. Cash transfers for rural homes, those who need it most, might have spelt quick relief. While capital expenditure—which pushes money around in longer cycles—has not exactly got short shrift, it appears inadequate to the task. Instead, a rural splurge on a maze of schemes is expected to achieve a multitude of ends. If executed well, these could yet boost growth. But that’s a big if. There are other unknowns, too, some of them unusual. Apart from the risk of an external whammy, not to speak of internal politics getting too visceral, a virulent virus could go viral across the world and warp trends.

Thankfully, the Centre has gone easy on taxes, revenue projections for which look more realistic than last time. Not so its disinvestment goal, though. Some critics may sigh over a lost chance for it to offer a “credible" fiscal deficit, with all its borrowings reflected in this gap between the expected intake and outgo for the year, but our fiscal law won’t allow such an admission. In fact, Sitharaman has had to resort to an emergency escape clause that permits a deviation of half a percentage point from our so-called fiscal glide path. If the fiscal deficitfor 2019-20 came in at 3.8% of gross domestic product (GDP) instead of 3.3%, the gap for next year is placed at 3.5% instead of 3%. Whether this target of 3% makes sense for a country like ours has been a matter of furious debate. It may yet be possible to legislate it away, but for now, the government seems wary of dumping it. Could its old promise of “minimum government" explain this diffidence?

For most practical purposes, big government is back anyway. Ever since private investment lost its verve and globalization began to gasp about a decade ago, it was clear that the state would assume a bigger role in our economy. But it took consumption, which had held up for years, to sag across the country for that to look like the only way out. A credit crunch only added to the urgency of state action, even as the central bank’s handle on the actual cost of capital weakened visibly. Some of these woes can be traced to the shock of a sudden cash vacuum in late 2016. Directly or indirectly, the sequence of events since then shifted the burden of a revival almost entirely onto New Delhi. While the fisc has understandably been loosened, Sitharaman has assured us that it won’t set the stage for profligacy. Yet, unless growth shows a surprise rebound, the Centre may be tempted to overdo its spending, lift India’s 6% cap on inflation, and thus inflate some of its debt away. Given the benefits of a rupee that retains its internal value for decades on end, that would be a bad idea. Spending priorities can still be altered to maximize their impact, but the basics must hold steady.

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