No easy answer to economic slowdown (The whole bet is on higher credit flow to revive private investment)

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 No easy answer to economic slowdown (The whole bet is on higher credit flow to revive private investment)

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• The number : Everyone looks for the key number - ratio of fiscal deficit to GDP - in the Union Budget. When it goes down, it shows discipline and reform. If it goes up, it is considered bad. But the 2018-19 Economic Survey had suggested that since private investment wasn't working out, public investment must immediately pick up (so FD can be increased).  
• What does that mean : The borrowings of the Union Govt. in Indian markets are huge, so little is left for the private sector. Hence, it should leave a lot more for the private players.
• Did not mention the FD figure at all : The Finance Minister avoided saying about the Fiscal Deficit at all in the Budget speech! This never happened before.
• The story of Fiscal Deficit so far : From 5.9% of GDP in 2011-12, it came down to 3.9% in 2015-16. Today it is regularly missing the targeted figures, and is at 3.4%. Now the target is 3.3% for 2019-20. And it is 3% for 2020-21, an impossibility. (and all this with many large expenses hidden in the calculation - so the real figure is much higher - CAG)
• Problems on revenue side : These are persisiting. So :

1. The GoI has cut back on traditional subsidies like food, fertiliser and petroleum, bringing them from 2% of GDP to 1.4%.
2. New expenses are - PM-KISAN at Rs.75,000 cr for 2019-20. MGNREGS outlays are growing slowly, annually.
3. Tax-GDP ratio : Post the demonetisation and GST launch, both direct and indirect taxes were to rise steadily and tax-to-GDP ratio would jump. For the present year 2019-20, it is slated to DECREASE to 11.7%  from 11.9% in 2018-19. GST is not stabilising as hoped .

• How to bridge the gap quickly : The CEA suggested in Economic Survey that GoI should choose the "capital receipts" route - (a) sell PSU lands, and (b) go for aggressive disinvestments. But selling land is legally cumbersome, and disinvestments have not been strategic so far (actual sale) but selling of one PSU to another PSU! And in any case, these 2 measures only postpone the problem of fiscal sustainability, not solve it.
• Bimal Jalan to the rescue : The Jalan Committee on ECF for RBI (Economic Capital Framework) was constituted to see the possibility of transferring a large chunk from the RBI surplus to the GoI. But the Committee perhaps does not prefer to do it.
• Why poor private investment : First, the govt. borrows too much leaving little for private firms. And second, the twin balance sheet problem - high debt in companies, and high NPAs of banks. Without resolving this, private investment won't pick up.
• Recapitalising the PSBs : The Budget proposes Rs.70,000 cr to recap the banks, but if done over many years, it will be futile. Do it in one shot, suddenly, to have a long-lasting impact.
• NBFCs supported : PSBs will buy the pooled assets of NBFCs of upto Rs. 1 lakh crore in 2019-20, and get upto 10% cover for any loss.
• Summary : The Govt is hoping that the flow of credit getting boosted will revive private investment. What if it does not? It is time to change the fiscal deficit target from a number to a range, as the total government FD (centre + state) is anyway coming down.
• The entire hope of the government is that boosting credit flow to the private sector will revive private investment in the economy, boosting growth.

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