Indian policymakers have demonstrated an exemplary level of fiscal and monetary policy coordination in safeguarding macro-stability in the post-Covid recovery period. They refrained from exceptional demand-side stimulus at the peak of the economic crisis and have shown commitment to gradually withdrawing the accommodative bias in policy. Financial markets have, by and large, appreciated this conservative policy stance.
As we enter the election season there are some question marks over whether there will be any significant change in this policy framework. The poll promises from both sides of the political spectrum have been abundant. Competitive populism seems to have taken centrestage with not much discussion about its fiscal ramifications. The government has announced the extension of the free food programme for 800 million people for another five years. Farm loan waiver, cash for women and unemployed youth, bonus over the central government announced Minimum Support Price (MSP), and a return to the Old Pension Scheme (OPS) are some of the populist promises that could have fiscal implications. Whether each one of these schemes is justified or not is a larger political economy question that is not the focus of this article. We intend to assess whether there is any fiscal space left for populism.
There are three different lenses through which we can approach the issue of the existence of fiscal space. One, whether the central government can announce some measures in the rest of FY24 without compromising on the 5.9% of Gross Domestic Product (GDP) fiscal deficit target. Two, how to evaluate the 4.5% of GDP medium-term fiscal deficit target set for FY26 in the context of these populist announcements. Three, what about the fiscal space for state governments to consider these additional spends. We might not be able to do justice to the third issue in this article given the heterogeneity in state-level fiscal positions, but the aggregate fiscal deficit for states might have already reached the pre-Covid level. We focus on the first two below.
Based on the 1HFY24 fiscal data of the central government, we think that the net tax revenue proceeds could be higher than estimated by ₹70,000-80,000 crore even if growth moderates a bit. Direct tax collections have grown at 22% till now, much higher than the 10% growth budgeted. Even on the indirect tax front, monthly GST revenues are averaging close to ₹1.7 trillion (lakh crore), in line with budget estimates. The government has received a ₹45,000 crore higher dividend from the Reserve Bank of India too. This presents a pretty picture on the revenue side despite divestment likely to fall below target.
However, spending is also likely to be higher than estimated even though the government has mostly resisted announcing any large-scale new programmes. MSP increase has been modest compared to pre-election year trends and somewhat populist schemes such as higher cooking gas subsidy and dearness allowance increase for public sector employees will have relatively lower fiscal costs. Unfortunately, fertiliser subsidies and MGNREGA payments, on which the government does not have much discretion, could exceed the budget estimates materially. These additional expenditures might exhaust most of the fiscal headroom created by better than expected tax revenues in FY24.
Does this mean that the option for any stimulus spending is completely closed for FY24? In our view, for any pre-election fiscal stimulus in FY24, some new sources of revenue or expenditure reduction would have to open up. It could be in the form of some savings on schemes where states already have unspent funds or are unable to deploy the capital budget allocated to them or higher revenue in the form of an interim dividend from RBI. We do not think that the central government will opt for any cut in capex to accommodate pre-election spending. If at all, the populist ideas could be part of the FY25 budget to maximise the “announcement effect”, but suffice it to say that markets are not perturbed about the near-term fiscal situation.
The uncertainty is more about how the central government will be able to adhere to its medium-term fiscal deficit target of 4.5% of GDP by FY26. Is it going to be through revenue enhancement or expenditure compression? The gross tax to GDP ratio at more than 11% is already close to historic highs and there is scepticism over whether this can be extended further solely through better compliance. With increasing tax rates being politically challenging, the onus of deficit reduction might lie on expenditure cuts unless the government can substantially increase the non-tax revenues through reviving divestments.
It is interesting to note that if the government meets its revenue expenditure target of 11.6% of GDP in FY24, then it would have almost returned to its pre-Covid average of 11.2%. The more substantial increase has been in capex which has almost doubled to 3.3% of GDP. It will surely not be a prudent idea to withdraw public capex till there are enough signs of private capex recovery. Hence any expenditure compression might entail politically difficult revenue expenditure cuts. In that context, any announcement of the continuation of subsidies for longer periods could dilute the government’s commitment to medium-term fiscal targets.
This market fear gets particularly aggravated because historically India has not had a great record in meeting medium-term fiscal targets. Although this government has met the target in the last two years, the markets still want more visibility on the medium-term roadmap. As India gets included in the global bond index next year, the scrutiny on the fisc is likely to increase further, limiting fiscal flexibility. On the other hand, the fiscal deficit must fall below 5% of GDP for the public debt-to-GDP ratio to stay on its declining path, comforting the rating agencies. Will the impetus from the private sector improve enough to compensate for the drag on GDP growth from this constrained fiscal stance? This is the dichotomy of India’s fiscal policy – some stimulus can be absorbed now but would that take us further from meeting the medium-term target? Hopefully, the 16th Finance Commission will deliberate more on this.
Samiran Chakraborty is managing director and chief economist, India, Citigroup. The views are personal
Is there more room for competitive populism?
3
0
15.11.2023
Indian policymakers have demonstrated an exemplary level of fiscal and monetary policy coordination in safeguarding macro-stability in the post-Covid recovery period. They refrained from exceptional demand-side stimulus at the peak of the economic crisis and have shown commitment to gradually withdrawing the accommodative bias in policy. Financial markets have, by and large, appreciated this conservative policy stance.
As we enter the election season there are some question marks over whether there will be any significant change in this policy framework. The poll promises from both sides of the political spectrum have been abundant. Competitive populism seems to have taken centrestage with not much discussion about its fiscal ramifications. The government has announced the extension of the free food programme for 800 million people for another five years. Farm loan waiver, cash for women and unemployed youth, bonus over the central government announced Minimum Support Price (MSP), and a return to the Old Pension Scheme (OPS) are some of the populist promises that could have fiscal implications. Whether each one of these schemes is justified or not is a larger political economy question that is not the focus of this article. We intend to assess whether there is any fiscal space left for populism.
There are three different lenses through which we can approach the issue of the existence of fiscal space. One, whether the central government can announce some measures in the rest of FY24 without compromising on the 5.9% of Gross Domestic Product (GDP) fiscal deficit target. Two,........
© hindustantimes
visit website
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Andrew Mitrovica
Mort Laitner
Rami G Khouri
Ali Fathollah-Nejad
Nikkei Editorial
