Lower deficit will, in short run, lead to lower growth
Given the nature of what drives economic growth, the Economic Survey is stating the obvious when it says GDP cannot grow at a faster rate—it puts a range of 6.1-6.7% for FY14 as compared to FY13’s expected 5%—unless there is a significant pick up in levels of both savings and investment. And while savings are down to multi-year lows, the larger point here is that unless government dis-savings reduce, savings simply cannot rise to required levels. Indeed, India’s golden years of growth—FY06 to FY08—were years in which overall public sector savings (that includes government as well as its PSUs and departmental units) were rising. From a net dis-savings of 0.65% of GDP in FY03, public sector savings rose to 2.41% of GDP in FY06 and to 5% of GDP in FY08 before falling to 1.3% in FY12—data for FY13 is not out, but it’s likely to be even lower.
The problem, however, is that though savings levels have come down—and within this, the amount saved in financial instruments has fallen further as the panel on our front page shows—this is not enough to explain the collapse in growth in FY13. This is where the role of project delays comes in, and this is where the story can spin into further despair or you can have a surprise lift in growth prospects. The Survey pleasantly surprises all by using data from CMIE’s CapEx database to show the value of stalled projects is up from around R3 lakh crore two years ago to around R7.5 lakh crore today—the latter figure totes up to around 7.5% of GDP. This doesn’t mean that as high a proportion of potential GDP has been knocked out since projects get completed over years, but what it means is that (a) if projects continue to get delayed on account of environment or other reasons, even the current rates of savings will deliver lesser units of GDP, but (b) if the government is able to get projects cleared faster, we can have more units of GDP for the same levels of savings.
Given this, what can we expect from the Budget? For one, unless projects are cleared, even a rate cut by RBI won’t do much to spur demand, so even a desirable reduction in the deficit will lower GDP growth levels in FY14. This is not only where the Cabinet Committee on Investment comes in, it is also where the tax cases on Vodafone and Shell assume significance since these are big sentiment-killers. To the extent the Food Security Bill gets operationalised, this means less flexibility for the government to spend on capital formation or even on counter-cyclical expenditure programmes, though no one could care less about this in the last year of a government. Growth coming back, to the extent it does, is a good thing but it will worsen the already precarious current account deficit—as US growth picks up, global liquidity will ease up, so FII flows will swing like yo-yos and it’s difficult to say what will happen to the rupee. Easing up FII or ECB limits is an easy response and the Budget will make moves here but that’s no solution. Indeed, another reason why growth will take time to pick up is that banks have a capital problem—the Survey hints at using disinvestment proceeds to recapitalise PSU banks—and India Inc needs some time to digest its investment binge of the last few years. Instead of heroics—very aggressive GDP growth (more than 6.5%) assumptions and tax collection growth projections (more than 14%)—the Budget will do well to accept FY14 as a year of attempting to limp back to normalcy, and nothing more.