In the weeks preceding the presentation of the Budget every year, many economists, politicians, and others urge the government to overlook fiscal concerns and spend more because "this time it is different" and "drastic situations demand drastic measures". These suggestions should not be accepted this time or any time.
Unfortunately, often such urgings are heeded to. The Narendra Modi government, however, has been more or less prudent in fiscal matters. But it may increasingly become difficult to remain so. For the coronavirus and the ensuing nationwide lockdown badly hurt the economy, resulting in an almost 24% contraction in the first quarter of 2020-21, a big dent to the already struggling manufacturing sector, millions of job losses, and decimation of innumerable enterprises. To be sure, this time it is truly different. Yet, the remedy offered by several experts—increased government spending—is worse than the malady.
Owing to the wide acceptance of statist principles across the political and even ideological spectrum, few have an aversion for the fiscal deficit. The Left has always been a champion of profligacy. Those who are considered to be on the Right—economic liberalisers and industrialists, for instance—also want that the Modi government should bid adieu to prudence. Finance minister Nirmala Sitharaman, we are told, shouldn’t worry about the expenditure. As if it is possible to spend one’s way out of a crisis.
These grandees tend to ignore important facts. First, the government can speed up economic growth and development by negative actions, not positive ones. That is, the government must give up controls and regulations, thus letting entrepreneurship flower. Further, it must rein in its agencies, which have acquired an anti-business reputation over the years.
There are many people in the system who believe that every businessman is a potential crook who needs to be restrained lest he wreak havoc; the truth is that most people, including industrialists, are law-abiding and thus should be treated as such. Of course, every criminal should be brought to book, but not everybody should be unnecessarily suspected of wrongdoing. Sadly, the anti-business bias is systemic; this has resulted in an exodus of wealthy Indians to countries like the US, Australia, and Canada, which offer not just better living conditions but also a business-friendly environment.
This is not to say that nobody is showing interest in investing in India; the American billionaire Elon Musk did that recently. But the problem is that the investment pledges made rarely get translated into greenfield or even brownfield projects. Come to think of it, even if a fraction of all the promises made at the myriad global investment meetings had held good, the Make in India programme would have been a roaring success internationally by now; investors from all over the world would have been queuing up to put their money in our country. But, alas, there is many a slip between an investment pledge and its redemption.
Those favouring fiscal profligacy also overlook the reality of public finance. The National Statistical Office has reportedly pegged the central government’s fiscal deficit at 6.1 per cent or above in 2020-21 (FY21). The gap between expenditure and revenue is estimated to be at least Rs 12 lakh crore. The fiscal deficit by November-end had already zoomed to Rs 10.75 lakh crore or more than 135 per cent of the budgeted figure. This was primarily because of low revenue realisation which in turn was because of the lockdown-induced blow to business activities.
The figures paint a grim scenario. The revenue shortfall may be in the region of Rs 7 lakh crore this fiscal, for both the tax collection as well as disinvestment proceeds have been less than what was estimated in the Budget. The revised estimates for this fiscal have reportedly come down by 27 per cent to Rs 19.33 lakh from the Budget forecast of Rs 26.33 lakh crore.
Disinvestment in public sector undertakings of PSUs was expected to get Rs 2.1 lakh crore to the government, but barely 6 per cent of that has been collected. According to government data, till December 2020 disinvestment gave just Rs 12,778 crore.
It needs to be mentioned here that the fiscal deficit is not some fancy number economists play with; it is a measure of excessive government expenditure which has real consequences, ranging from high inflation to downgrade in ratings by international agencies.
A higher deficit would result in higher borrowings; these must be avoided at all costs. Yes, money is required to revive the economy. For that, the government should cut down its own expenditure. More importantly, it must expedite the sale of PSUs and public sector banks (PSBs). These would be bold reforms, but if state governments can liberalise labour laws—the boldest of all liberalising moves—the Narendra Modi regime can also sell PSUs and PSBs.
In other words, there are several ways and means to decrease expenditure and augment revenue; there is no need to pump-prime the economy. Keynes is dead; the government shouldn’t try to resurrect him.