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Today, Indian economy is much more exposed to the external dynamism than anytime in past—being unfavourable for the past many years. During this period, its domestic affairs were also not very favourable. For the forthcoming year 2017-18, the following outlook73 may be predicted:
In this regard, it will be useful to examine the four following components of aggregate demand:
• Exports: Exports appear to be recovering on the back of increasing global economic activity. This looks continuing post-US elections which is expected to announce fiscal stimulus. The IMF’s update (World Economic Outlook, January 2017) has projecting an increase in global growth from 3.1 per cent in 2016 to 3.4 per cent in 2017, with a corresponding increase in growth for advanced economies from
1.6 per cent to 1.9 per cent. As India’s real export is highly elastic to global GDP, higher exports can contribute to 1 per cent growth in the year.
• Consumption: The outlook for private consumption is less clear. International oil prices are expected to be about
10-15 per cent higher in 2017 (compared to 2016), which would create a drag of about 0.5 percentage points. On the other hand, consumption is expected to receive a boost from two sources—firstly, catch-up after the demonetisation-induced reduction in the last two quarters of 2016- 17; and secondly, due to cheaper borrowing costs (likely to be lower by
0.75 to 1 per cent). As a result, spending on housing and consumer durables and semi-durables could rise smartly. Predicting monsoon prospects for 2017 so early looks difficult thus clues regarding agricultural production are not certain—though the year 2016-17 is estimated to be a record year for foodgrain production.
• Private Investment: Since no clear progress is yet visible in tackling the twin balance sheet (TBS) problem, private investment is unlikely to
recover significantly in the year.
• Government: Some of this weakness could be offset through higher public investment, but that would depend on the stance of fiscal for the year, which has to balance the short-term requirements of an economy recovering from demonetisation against the medium-term necessity of adhering to fiscal discipline—and the need to be seen as doing so.
Overall, the real GDP growth is expected to be between 6.75 to 7.5 per cent
—the country to remain the fastest growing economy in the world. This prospect for the economy in 2017-18 is though exposed to three main downside risks—
(i) The extent to which the effects of demonetisation could linger into next year, especially if uncertainty remains on the policy response. Currency shortages also affect supplies of certain agricultural products, especially milk (where procurement has been low), sugar (where cane availability and drought in the southern states will restrict production), and potatoes and onions (where sowings have been low). Vigilance is essential to prevent other agricultural products becoming in 2017-18 what pulses were in 2015-16.
(ii) The geopolitics could take oil prices up further than forecast. The ability of shale oil production to respond quickly should contain the risks of a sharp increase, but even if prices rose merely to US $ 60-65 per barrel the Indian economy would nonetheless be affected by way of reduced consumption; less room for public investment; and lower corporate margins, further denting private investment. The scope for monetary easing might also narrow, if higher oil prices invited inflationary pressure.
(iii) There are risks from the possible eruption of trade tensions amongst the major countries, triggered by geo-politics or currency movements. This could reduce global growth and trigger capital flight from emerging markets including India.
The one significant upside possibility is a strong rebound in global demand and hence in India’s exports. There are some nascent signs of that in the last two quarters of 2016. A strong export recovery would have broader spillover effects to investment.
The fiscal outlook for the central government for next year will be marked by three factors:
(i) The increase in the tax to GDP ratio of about 0.5 percentage points in each of the last two years, owing to the oil windfall will disappear. In fact, excise-related taxes will decline by about 0.1 percentage point of GDP, a swing of about 0.6 percentage points.
(ii) There will be a fiscal windfall both from the high denomination notes that are not returned to the RBI and from higher tax collections as a result of increased disclosure under the Pradhan Mantre Garib Kalyan Yojana (PMGKY). Both of these are likely to be one-off in nature, and in both cases the magnitudes are uncertain. The fiscal gains from it will take time to get fully realised.
(iii) It appears that the GST will probably be implemented later in the fiscal year (as per Government it will be implemented from July 2017). The transition to the GST is so complicated from an administrative and technology perspective that revenue collection will take some time to reach full potential. Combined with the government’s commitment to compensating the states for any shortfall in their own GST collections (for next 5 years at a baseline of 14 per cent increase), the outlook must be cautious with respect to revenue collections. The fiscal gains from the GST will also take time to be fully realized.
The revenue outgo on account of the implementation of the 7th Pay Commission may dilute the fiscal gains discussed above.
Important macroeconomic policy requirements and needs will be as analysed below:
• The economy needs policy support to recover smoothly from demonetisation. If bank deposits grow—lending, and yields on G-Secs should be lower—and will provide a boost to the economy. Though, sharp rise in oil prices and those of agricultural products, would limit the scope for interest rate cuts from the RBI.
• The Government needs to continue its fiscal credibility and prudence by remaining committed to reducing fiscal deficit like past four years (it has been set at 3.2 per cent for the year by the Union Budget 2017- 18). Fiscal deficit has been reduced by the Government from 4.5 per cent of 2013-14 to 4.1 percent, 3.9 per cent, and 3.5 per cent in the following three years.
• The use of the fiscal windfall (comprising the unreturned cash and additional receipts under the PMGKY) which is still uncertain, will be one key issue. Since the windfall to the public sector is both ‘one off ’ and a ‘wealth gain’ (not an income gain), it should be deployed to strengthening the government’s balance sheet rather than being used for government consumption, especially in the form of programs (that create permanent entitlements). The best use of the windfall would be to create a “public sector asset reconstruction/rehabilitation company/agency” (i.e., advised as PARA) so that the twin balance sheet problem can be addressed—by three possible means:
(i) facilitating credit and investment revival;
(ii) compensating states for revenue shortfalls due to the GST; and
(iii) clearing debt.
Meanwhile, the Government by mid-February 2017 indicated about its willingness to set up such an agency.
• On reforms front , structural reforms will be the most important boost to growth together with—strategic disinvestment, tax reform, subsidy rationalization and addressing the twin balance sheet problem. In the case of the twin balance sheet problem, past experiences suggest that creating a rehabilitation agency (PARA) will be the best way out of the situation.
• Given the difficulty of reforming labour laws, the thrust could be to move towards affording greater choice to workers which would foster competition amongst service providers. Choices would relate to:
(i) whether they want to make their own contribution to the Employees’ Provident Fund Organisation (EPFO);
(ii) whether the employers’ contribution should go to the EPFO or the
National Pension Scheme; and
(iii) whether to contribute to the Employee State Insurance (ESI) or an alternative medical insurance program.
At the same time, there could be a gradual move to ensure that at least compliance with the central labour laws is made paperless, presence-less, and cashless.
On the expenditure side, the studies make clear that existing government programs suffer from poor targeting. One ‘radical idea’ to consider is the provision of a universal basic income (UBI). Another more modest proposal worth embracing is procedural—no new welfare programme should be launched without introspecting the improvement angle over the existing ones. Together with it, the government needs to evaluate and phase down existing programmes which are not serving their purposes. It will not only strengthen the cause of welfare targeting but bring in more legitimacy in the state.
1. L. N. Rangarajan (ed.), The Arthashastra, Penguin Books, (New Delhi, 1992).
2. The size of government expenditure for the developed economies stood at almost 10 per cent of their GDPs at the begining of the 20th century—which could rise to 18 per cent only at the outbreak of the Second World War—went for a steep rise by 1980 to 40 per cent. The government expenditure was barely 9 per cent of the GDP in India at the time of Independence, nearly doubled in 1970s and reach 75 per cent in the 1980s—when questions were raised about their sustainability as revenue receipts failed to grow adequately resulting in rising budgetary deficits (see Amaresh Bagchi (ed.), Readings in Public Finance, Oxford University Press, (New Delhi: 2005) pp. 1–4.
3. It should be noted here that the world which had the form of the state economy (i.e., the Socialist countries at this time, majority of the economic activities were under government control. As the communist form of the state economy emerged by the late 1940s (i.e., Peoples Republic of China, 1949), it had 100 per cent state control over the economic activities.
4. Collins Dictionary of Economics, op. cit., & Oxford Dictionary of Business, op. cit.
5. Based on the budgetary documents of the Ministry of Finance, Government of India, New Delhi.
6. MInistry of Finance, Union Budget 1987–88 (New Delhi: Government of India, 1987).
7. Review of the Working of the Monetary System, headed by Sukhomoy Chaktravarthy, Reserve Bank of India, Government of India, New Delhi, 1985.
8. Raja J. Chelliah, ‘The Meaning and Significance of the Fiscal Deficit’, in Amaresh Baghi (ed.), Readings in Public Finance, (New Delhi: Oxford University Press, 2005), pp. 387–88. Also see Ministry of Finance, Union Budget 1997–98, (New Delhi: Government of India, 1997).
9. Raja J. Chelliah, ‘The meaning and significance of public deficit’, p. 381 & p. 387. Also see Ministry of Finance, Union Budget 1997–98.
10. Ministry of Finance, Union Budget 1997–98.
11. Raja J. Chelliah, p. 389. Also see Ministry of Finance, Union Budget 1997–98.
12. In the US economy if tax revenue falls short of government expenditures, the government has a fiscal deficit, and it means that the government needs to borrow in the capital market to cover the difference. Opposite to it, if the government runs a fiscal surplus (i.e., its tax revenues exceed its expenditure) then the government, like the household sector, will be a net saver and will represent a source of saving for the economy (see Stiglitz and Walsh, Economics, 549).
13. J. K. Galbraith, A History of Economics, (London: Penguin Books, 1987) p. 226. (The whole Chapter XVII on J.M. Keynes (pp. 221–36) is interesting to refer on the topic.)
14. For a detailed discussion on the topic one may refer to Joseph. E. Stiglitz,
Economics of the Public Sector, (New York: W.W. Norton, 2000).
15. It should be noted here that although the governments had run deficits (i.e., budget deficit) even before the Keynesian idea of the deficit, the pre-Keynesian thinking was that in peacetime the budget should generally be balanced
(i.e., neither deficit nor surplus), or even in surplus so that the government debt created by wartime deficits could be paid off. For further reference on the topic and its constraints, Stanley Fischer and William Easterly, Economics of the Government Budget Constraints, World Bank Research Observer, Vol. 5, No. 2, July 1990, pp. 127–42;
also reproduced in Amaresh Bagchi (ed.), Readings in Public Finance, pp. 301–19.
16. Ibid.
17. Ibid.
18. Ibid.
19. L.N. Rangarajan, The Arthashastra, pp. 259–62.
20. J. Cullis and P. Jones, Public Finance and Public Choice ( New York: Oxford University Press, 1998).
21. The acclaimed definition first came up in the widely used work Macroeconomics by Dornbusch and Fisher which is now available as R.S. Dornbusch, S. Fisher and Richard Startz, Microeconomics, (New Delhi: Tata McGraw-Hill, 2002).
22. John Hicks, the British Nobel Laureate did show it referring changes in taxes and government expenditure using the framework of the famous IS-LM model (Ibid).
23. S. R. Maheshwari, A Dictionary of Public Administration (New Delhi: Orient Longman, 2002) p. 227.
24. In his acclaimed work The General Theory of Employment, Interest and Money,
1936.
25. Stiglitz and Walsh, Economics, p. 729.
26. Samuelson and Nordhaus, Economics, p. 412.
27. Based on the elaboration by Samuelson and Nordhaus, Economics, pp. 412–13.
28. For a detailed data-based discussion refer to Sudipto Mundle and M. Govinda Rao, ‘Issues in Fiscal Policy’ in Bimal Jalan (ed.), The Indian Economy: Problems and Prospects (New Delhi: Penguin Books, 2004),
pp. 258–85.
29. This was the general feeling among experts, policymakers and the IMF, alike.
30. The proximate cause of the payment crisis in the mainstream perspective, was faulty macroeconomic policies, specially large fiscal deficits of the government during 1984–91, deficits that spilled over in country’s current account of the balance of payment. (See Mihir Rakshit, ‘The Micro-economic Adjustment Programme: A Critique’, Economic and Political Weekly 26(34) (August), quoted by Mihir Rakshit, ‘Some Microeconomics of India’s Reform Experience’ in Kaushik Basu (ed.), India’s Emerging Economy: Performance and Prospects in the 1990s and Beyond (New Delhi: Oxford University Press, 2004), p. 84.
31. S. D. Tendulkar and T.A. Bavani, Understanding Reforms (New Delhi: Oxford University Press, 2007) p. 73.
32. Bimal Jalan, India’s Economic Policy ( New Delhi: Penguin Books, 1992) p. 48.
33. Handbook of Statistics on the Economy 2002–03, Reserve Bank of India, Table 221 (cited by Tendulkar and Bhavani, Understanding Reforms, p. 74).
34. Bimal Jalan, India’s Economic Policy, p. 50
35. Reserve Bank of India, The Report of Tenth Finance Commission (New Delhi, Government of India, 1994) (as quoted in Bimal Jalan, India’s Economic Policy, p. 50.
36. This scheme has changed now. After the implementation of the suggestions of the 12th Finance Commission states are now allowed to go for market
borrowings to take care of their plan expenditures once they have passed and enacted their Fiscal Responsibility Acts (FRAs) in consonance with the FRBM Act, 2003.
37. Based on the points raised by Bimal Jalan, p. 49.
38. this factor seems getting redressal with the starting of outcome and performance
budgeting 2004–05 onwards.
39. Ministry of Finance, Economic Survey 2006–07, (New Delhi: Government of India, 2007), p. 18.
40. Ibid.
41. Ibid.
42. Ministry of Finance, Economic Survey 2003–04, (New Delhi: Government of India, 2004).
43. Economic Survey 2013–14; 2014–15 and 2015–16.
44. The acceptance to the recommendations of the 13th and 14th Finance Commissions by the Government of India in this regard have been highly effective.
45. We find similar view being forwarded by the Ministry of Finance, Economic Survey 2015–16, Vol. 1 & Vol. 2 (New Delhi: Government of India, 2016).
46. Opposite to it, in the UK, the government has overriding powers on the central bank and there is absence of any legal checks on money creation powers of the government. Once the UK becomes part of the European Union it will come under such a check through the Maastricht Treaty. Before the enactment of the FRBMA, 2003. India was like the UK, however, the Constitution of India has a provision for imposing a statutory limit on the centre’s borrowing powers under Article 292. But the Article is not mandatory and has not been invoked by any of the governments till date.
47. By the Congress passing the Balanced Budget Act, 1997 which promised to eliminate federal deficit spending by 2002 (see Nicholas Henry, Public Administration and Public Policy (New Delhi: Prentice-Hall, 2003), p. 217.
48. Argentina introduced this arrangement in the late 1990s.
49. Ministry of Finance, Economic Survey 1994–95 (New Delhi: Government of India, 1995).
50. IMF imposed some macro-economic conditions on the economy while India borrowed from it for its BoP correction in 1990–91. One among the conditions was cutting down the government expenditure (i.e., salaries, pensions, interest and subsidies, etc.) by
10 per cent every year.
51. George R. Terry and Stephen G. Franklin, Principles of Management (New Delhi:
AITBS, 2002), pp. 9–10.
52. See Peter A. Phyrr, ‘The zero Base Approach to Government Budgeting’, Public Administration Review, 37 (Jan./Feb., 1977), 7; and Thomas P. Lauth, ‘Zero-Base Budgeting in Georgia State Government: Myth and Reality’, Public Administration Review, 38 (Sept./Oct., 1978) pp. 420–30; (cited in Nicholar Henry, Public Administration and Public Affairs (New Delhi: Prentice-Hall, 2003), p. 217.
53. Nicholas Henry, Public Administration and Public Affairs, p. 218.
54. In the Constitution of India it is deliberated in the Article 112 (3), a - g, where it is referred as ‘expenditure charged’ on the consolidated fund of India—popular as the ‘charged expenditure’ (see Ministry of Law, Justice and Company Affairs, The Constitution of India, Government of India, New Delhi, 1999), pp. 38–39).
55. See Samuelson and Nordhaus, Economics, 710; Stiglitz and Walsh, Economics, pp. 552–54.
56. Mathew Bishop, Pocket Economist, p. 104.
57. Ministry of Finance, Union Budget 2006–07, (New Delhi: Government of India, 2007).
58. Based on the notes released by the Ministry of Finance, Government of India, October 2006 while releasing the Quarterly Review of the Union Budget 2006–07.
59. Rules of Procedure and Conduct of Business in Lok Sabha, Parliament Secretariat, New Dehli.
60. Dirk Schoenmaker, “A New Financial Stability Framework for Europe”, The Financial Regulator, o, 13 (3), 2009.
61. Edward Chancellor, “Germany’s Eurozone Trilemma”, Financial Times, 6 November, 2011.
62. Martin Wolf, “The Political Genius of Supply Side Economics”, Financial Times,
2010.
63. Dani Rodrik, “The Inescapable Trilemma of the World Economy”, 27 June, 2007,
(Erodrik.typepad.com/dani_rodriks_weblog.
64. Niall Ferguson, “Conservatism and the Crisis: A Transatlantic Trilemma”, Centre for Policy Studies, Ruttenberg Lecture, 24 March, 2009.
65. Ministry of Finance, Economic Survey 2011–12, p. 69.
66. Ministry of Finance, Economic Survey 2015–16,
pp. 28, 123, 213; Publication Division, India 2016 (New Delhi: Government of
India, 2017) pp. 718.
67. W. W. Rostow, The Process of Economic Growth (Oxford: Clarendon Press, 2nd edition, 1960),
pp. 302-303, cited in B. R. Mitchell, ‘The Coming of the Railway and United Kingdom Economic Growth), The Journal of Economic History 24(3), September 1964.
68. International Monetary Fund, World Economic Outlook-2014, Is it Time for an Infrastructure Push? The Macroeconomic Effects of Public Investment, October 2014.
69. Sam Asher Paul Novosad, The Employment Effects of Road Construction in Rural India, Working Paper 2014, quoted by the Ministry of Finance, Economic Survey 2014–15.
70. D. Rodrik, and D. A. Subramanian, From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transition, IMF Staff Papers, 52(2), 2005.
71. Robert Barro, ‘Government Spending in a Simple Model of Endogenous Growth”,
Journal of Political Economy, 98(5) 1990.
72. Reserve Bank of India, Fiscal Multipliers in India, Box II.16, Annual Report 2011– 12, (New Delhi: Government of India, 2012).
73. The discussion is based on the Economic Survey
2016-17, Vol. 1, pp. 20-22 and the Union Budget 2017-18 as well as other announcements of the Government of India.