Only animal spirits can fix GDP, deficit-tinkering won’t
If there is a lesson finance minister Arun Jaitley must draw from the lukewarm response to Tuesday’s railway budget, it is that investors want a clear-cut message. Apart from the obvious confusion that the budget’s numbers presented—the minister’s speech talked of an FY15 surplus of a mere R602 crore while the explanatory memorandum had a figure of R6,063 crore—the first part of the speech signalled fiscal prudence and new ways to attract funds, including FDI; the minister then threw cold water over this by announcing 58 new trains. It didn’t help that, as our lead column today points out, investors are not convinced PPP is going to work without some major overhauling; the Economic Survey appears to concur with the view on the limited capacity of PPP to deliver in its current form.
Given it is the sharp fall in government savings, and private corporate investments, that is at the heart of the current sub-5% growth cycle we are stuck in, it is this that the FM needs to address. As the Survey points out, getting animal spirits back is an important part of the exercise—so, Mr Jaitley’s budget has to focus on keeping the Sensex happy—since firms increase their investments when their GDP expectations are high; when the markets are high, this ‘increases the gap between market value and replacement cost’, to quote from the Survey, ‘which fuels investment’. Buoyant markets also help firms raise money and dispose off assets, both critical given India Inc’s fragile balance sheets. No amount of tinkering with capital expenditure numbers—increasing them by, say, R20,000-30,000 crore—is going to give an equal impetus to GDP growth which is also the only way to get the fiscal deficit back on track. Getting the markets to stay at their current levels means the FM needs to have an aggressive timeline for GST—a central GST simply isn’t going to cut it. It means, though the government is disinclined towards it for fear of the CAG, the retrospective tax amendment has to go along with the tax demands raised on the basis of it—if the law was bad, as everyone recognises, the taxes based on it are also bad and must go.
No one expects a sharp cut in subsidies later today, especially in a drought year, but the government has to be seen to be moving in the right direction. As FE has pointed out often enough, with people consuming less rice and wheat, even if it is better targeted like in Tamil Nadu and Chhattisgarh, there is no case for extending the PDS. Cash transfers to the poor will cost around R30,000 crore for the same amount of wheat/rice versus R1.2-1.5 lakh crore if this is done through the current PDS—no matter how good the PDS system is, it simply cannot compete with cash transfers; just ending FCI’s open-ended procurement will save R80,000 crore or more. Moving to Aadhaar will take time, but Jaitley can move markets if, as in the case of diesel, he announces a time-bound set of small cuts in LPG and kerosene subsidies subject to an overall cap. The other option the FM has is to tinker at the margin, cut subsidies a bit, raise capital expenditures a bit. It is a safe strategy, but it only goes downhill.