Former RBI governor C Rangarajan’s prescription to prioritise growth over fiscal consolidation in the coming budget is spot on. The economy is forecast to contract 7.7% in 2020-21, and if India is to grow at the same or higher rate in 2021-22, the government must hugely step up spending.
Investments, both State-funded and State-guaranteed, are needed to complete infrastructure projects that are ready to take off. India’s direct fiscal stimulus, at about 2.2% of the GDP this fiscal, is small. Globally, governments have provided a collective support of about $12 trillion, or almost 13% of the GDP, half of which is extra fiscal spending and the rest as liquidity support.
Failure by the government to spend more could trigger more loan defaults by companies with stressed finances, adding to the burden of bad loans for Indian banks. To spend more, the government must stop obsessing about the fiscal deficit. Rating agencies will look silly, if they downgrade an economy that borrows extra to invest more and spur growth.
Taking the economy to a higher growth trajectory will result in a falling debt-to-GDP ratio in the medium term. The ratio of government debt to GDP (the Centre and the states combined) of around 72% is lower than that of many other countries, and provides elbow room to borrow more. The extra investment needed to revive growth must also be catalysed through government policy and guarantees that will only add to the exchequer’s contingent liabilities.
Foreign capital should be drawn into infrastructure, instead of bloating asset prices, now that the world is awash with liquidity due to the quantitative easing by central banks. Offering providers of foreign capital a guaranteed rate of return will enhance its flow, and help complete projects such as the Delhi-Mumbai Industrial Corridor. The government should step up investments in healthcare, as also fulfil its promise to make large investments in farm-infrastructure. It must vastly improve its tax analytics and collections: December’s collections show the potential.