Clipped from: https://www.thehindubusinessline.com/opinion/editorial/fiscal-push/article69064841.ece
Loosening the purse strings now may do no harm
The Finance Ministry has done well to consider relaxing spending limits in the last quarter of FY25 to boost sputtering growth. With the economy having grown by just 6 per cent in the first half (a disconcerting 5.4 per cent in Q2), the time is ripe to impart a fiscal push to revive sagging demand — especially when monetary policy moves are more subject to global factors.
As a recent report in this newspaper points out, Centre’s expenditure as a percentage of Budget estimates for the fiscal was 57 per cent in April-November, against 59 per cent last year and still more in the preceding two years. The drop has been pronounced in the case of capex-oriented ministries such as surface transport, railways, defence, housing and communications. The underspending has been attributed to the general election, when project execution is held up, and a delayed FY25 Budget. Accordingly, some ministries may be allowed to spend more than their fourth quarter limit of 33 per cent, with formalities applicable for big ticket releases (above ₹500 crore) possibly being relaxed. While this is all very well, it is worth looking into whether public sector agencies are able to implement their order book.
Meanwhile, the Reserve Bank of India’s latest assessment of the economy observes that the private sector is merely ‘churning’ existing capacity in the absence of robust demand; therefore, the onus lies on the Centre to impart a ‘crowding in’ effect. Despite signs of underwhelming tax collections this fiscal, taking a slightly relaxed view on the fiscal deficit may not be such a bad idea. The fiscal deficit for H1 was 29.4 per cent of the Budget Estimate for the year, against 39.3 per cent last fiscal and 37.3 per cent in FY23. The tight-fistedness seems to be driven by the anxiety over lower nominal growth figures (9 per cent) in H1 than estimated in the Budget for FY25 (10.5 per cent). If the fiscal deficit target of 4.9 per cent of GDP and 4.6 per cent next year is to be met, an expenditure squeeze looks like the only way out when growth is tepid and revenues are not looking up. An RBI paper on government finances observes that although H1 revenue receipts were up 16.1 per cent, Q2 collections contracted by 2 per cent, while Q1 was buoyed by the RBI’s dividend transfer. Direct tax collections of the Centre, which account for over 40 per cent of revenue receipts (indirect taxes being marginally less) grew 14.4 per cent in the first half, but corporate tax collections were up just 2.3 per cent, with income tax collections growing 25 per cent.
These figures suggest that demand boost is needed at this stage, even if that means slightly overshooting the fiscal deficit target as a share of GDP. At the very least, the absolute fiscal deficit target of ₹16 lakh crore need not be undershot. That could start a virtuous cycle of rising incomes, higher capacity utilisation and better revenue collections, so that the fiscal deficit eventually remains in check in subsequent years.
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