Budget 2020: Fiscal Prudence Vs Fiscal Support - What Economists Want From The Government

Should such a deep slump prompt the government to step up spending to support the economy? Or should it remain committed to fiscal prudence (targeted fiscal deficit: 3.3 percent) in order to retain the confidence of investors, rating agencies and bond markets?

BloombergQuint speaks to economists to see what they believe the government should prioritise to best support the economy.

Mahendra Dev, IGIDR

Government expenditure has to be increased in order to reverse the ongoing cyclical slowdown, said Mahendra Dev, director of Indira Gandhi Institute of Development and Research. But, with already high public sector borrowings, state deficits and lower nominal growth, the government doesn’t have this luxury, said Dev.

While disinvestment, reducing non-merit subsidies, removing exemptions, increasing the tax base, shifting from revenue to capital expenditures etc. are some of the measures that can be used to raise resources for increased productive spending, these will take time, he explained.

In the short run, the government has to fast-track planned capex, encourage public-sector enterprises to invest more and clear pending bills for the corporate sector and small businesses. The national infrastructure pipeline is an important initiative but financing these investments is an obvious challenge, said Dev.

Lekha Chakraborty, NIPFP

Chakraborty, a professor at the National Institute of Public Finance and Policy, said that the government may need to spend more at this point.

Fiscal consolidation in recent years appears to have come at the cost of capital formation, she said. As a result, the growth model, which was earlier investment-led, changed to consumption-led.

The emphasis on reviving consumption is misplaced, she said, adding that investment led-growth is more sustainable. According to Chakraborty, the government needs to spend more on infrastructure and boost employment.

She also advised against dogged fiscal targeting. The European Union has increasingly realised that fiscal austerity has led to its economic downfall. To avoid falling in the trap of very tight fiscal rules, the government could look at a keeping the deficit in a range rather than targeting one fixed number, Chakraborty added.

Renu Kohli, Independent Economist

Kohli, an independent economist, said there’s no space for fiscal expansion from the expenditure or the revenue sides. The revenue constraints are very strong and binding and any fiscal expansion would need to come together with higher borrowings, which would be negative for growth due to an adverse impact on borrowing costs.

However, Kohli acknowledged that there’s a need to respond to slowdown.

According to her, it’s time for a radical structural overhaul of government spending. The quality of government expenditure has deteriorated significantly since 2016-17. Revenue expenditure has risen while share of capital spending has gone down, she said.

Amiya Bagchi, Monash University

The central government’s expenditure as a percentage of the GDP has been on the decline, said Amiya Bagchi, emeritus professor at the Institute of Development Studies and adjunct professor at the Monash University.

The central government's total expenditure—revenue and capital—have declined from a high of 15.4 percent of GDP in 2010-11 to 12.2 percent of the GDP in 2018-19. Capital expenditure has dropped from 2 percent of GDP in 2010-11 to 1.6 percent in 2018-19, while revenue expenditure has fallen from 13.4 percent to 10.6 percent over the same period, he explained.

To address the multiple structural issues inhibiting investments and weak consumer demand, he believes the government’s contribution needs to be pushed back up.

Where will the money come from?

Bagchi proposes funding this expenditure by higher marginal income tax rates and raising tax rates for domestic companies, moves that are unlikely to find favour with Finance Minister Nirmala Sitharaman.

Sudipto Mundle, NCAER

The government has room for more fiscal spending, said Mundle, distinguished fellow at the National Council For Applied Economic Research. However, this should be done without increasing the deficit or raising tax rates.

There are so many exemptions provided, especially when it comes to taxes. If the government can eliminate exemptions and concessions provided, considerable amount of resources can be freed up.

This, in turn, could be used towards expenditure which is critical to revive growth.