Prime Minister's Economic Advisory Council (PM-EAC) Chairman Bibek Debroy has set very low expectations from Budget 2020 given that the Centre neither has the leeway to cut taxes to stoke demand, nor can it hike GST rates to increase revenue. "On Budget day...it's unrealistic to have any big bang announcements," Debroy told BusinessToday.In.
Centre's hands are tied as it does not have the fiscal leeway to cut personal income tax to fuel a consumption boom, he said. On the buzz of hike in GST rates to shore up revenue for the government, Debroy said this is not the right time to hike GST rates when (GDP) growth rates are very low as it could slow down the economy further. Centre's indirect tax collection alone is likely to fall short by nearly Rs 2 lakh crore this fiscal due to slowing economy and evasion.
With the finance ministry's rapidfire measures failing to correct the slowdown, Debroy said they will take up to 2 years to deliver results: "Any policy change, an instrument, leads to a results with a time lag of anything between 18 months to two years." In a series of measures announced since August, finance minister Nirmala Sitharaman has announced big bank consolidation, increased liquidity in the market, incentivised exports, provided relief to telecom sector and created a fund to revive stressed real estate projects. However, the economic deceleration has continued unabated as India entered its longest spell of slowdown in over 2 decades with 6 successive quarters of deceleration in GDP growth to hit a new low of just 4.5 per cent in the June-September quarter.
Debroy, however, believes, "Our quarterly figures are always somewhat unreliable, they are estimates, and the firm figures are always available at the end of the year. Therefore, we should not get too swayed by the quarterly figures especially because they also depend on what happened exactly that same point one year ago in the same quarter." He says the economy will grow at 5 per cent in 2019-20 but growth will pick up to 6 per cent next fiscal.
On the disconnect between the government's measures towards reviving investment cycle while slowdown worsens due to lack of consumption and demand, Debroy says India must resist sectoral concessions as they cause distortions: "Economists, including myself, are prone to giving easy solutions without thinking through the consequences. I want to stimulate demand. What does that mean? Does that mean I want to give sectoral concessions? As an economist am I accepting that I want the distortion that arbitrary discretion leads to? Am I saying I should give across the board fiscal concessions? What happens to my deficit?"
So how will the demand be revived? According to Debroy, the options are limited: Finance minister has already announced that whatever was budgeted in terms of government expenditure which was held up for various reasons is going to be speeded up.
More than 62 per cent of public expenditure happens at the level of the states. It's completely unreasonable to expect the union government can do much in the way of speeding up public expenditure at the level of states.
Any attempt to perk up consumption through full transmission of interest rates is also unlikely as banks are reeling under their own problems. As a result, according to Debroy banks now build a risk premium in lending rate. "Because the corporate sector has not covered itself with glory, nor have corporate governance stakeholders like auditors, we have a situation where the risk premium or the range of risk premium has widened," he says.
On former chief economic advisor Arvind Subramanian's remark that the Indian economy is headed for the ICU, Debroy said: "I recently read a piece by Arvind Panagariya who quoted a piece that Arvind Subramanian wrote in 2000 saying that we were in ICU. So clearly the economy emerged from the ICU as long as Arvind Subramanian was the chief economic advisor and has gone back into ICU since he left."