Nirmala Sitharaman’s Budget is high on ambition but low on details; how will the big numbers be achieved?
Echoing Prime Minister Narendra Modi, Sitharaman said in her Budget speech that India would be a $5-trillion economy in 5 years.
The Economic Survey 2018-19 and the Budget say the GDP growth will be driven by investment over the next 5 years
The RBI June 2018 Financial Stability Report found that 23% of all infrastructure assets in the banking system was stressed
The Budget also suggests some new ideas about new financing instruments to raise investment capital
The most noticeable characteristic of the Union Budget 2019-20 is that it is high on ambition, but low on detail about how those ambitions are going to be realised. It is a very big picture in approach; when you began to look more closely, things get fuzzy. It’s a story of some very big numbers.
Start with the biggest number of them all, the Gross Domestic Product (GDP) number. Echoing Prime Minister Narendra Modi, Sitharaman said in her Budget speech that India would be a $5-trillion economy in 5 years. That has a nice ring to it, the kind you see in many corporate presentations about financial goals.
That $5 trillion is almost double our current GDP of roughly $2.6 trillion. In other words, India’s nominal GDP will have to grow at 14 percent per year, every year, over the next 5 years. In the last 7 years – that is 28 quarters from April 2012 – the GDP growth had been at 14 percent or higher in just three quarters: July-September 2012, July-September and October-December 2013, according to CEIC Data.
The average, over the 28 quarters up to March 2019, has been 11.5 percent. The highest growth was in the quarter ended September 2012 (16.1 percent) and the lowest was in the quarter ended March 2015 (8.3 percent). Please note: this is nominal GDP growth rates, and hasn’t been adjusted for inflation.
Which brings us to the next big, ambitious number in this year’s Union Budget? The proposal of Rs 100 lakh crore investment in infrastructure over the next 5 years. That’s an average Rs 20 lakh crore (or roughly $285 billion) every year. The Economic Survey 2018-19—tabled in Parliament on 4 July 2019 – and the Union Budget say that the GDP growth will be driven by investment, rather than consumption, over the next 5 years. A good place to start will be infrastructure investment trends, which, in theory, drive all other investments.
The G20’s Global Infrastructure’s Outlook study on infrastructure investment suggests that India’s investment in infrastructure is about Rs 6 lakh crore a year, or roughly $85 billion (in 2015, drawing from data in the Economic Survey of 2017-18, it was $59 billion). That’s a big gap to make up, from Rs 6 lakh crore to Rs 20 lakh crore a year.
Most infrastructure – and this is a global phenomenon – is financed by debt, both public and private; in fact, the private sector has accounted for nearly 40 percent of infrastructure investment, borrowing from banks, over the last five years. The Reserve Bank of India’s (RBI) June 2018 Financial Stability Report found that 23 percent of all infrastructure assets in the banking system was stressed; that number has come down to 17 percent in the June 2019 version (helped in part by assets sales and other regulatory actions).
Where will the financing for such large-scale new infrastructure investment originate, given the banking sector’s limitations? Even maintaining the current pace of infrastructure investment can be challenging, let alone accelerating it. India’s twin balance sheet problem—stressed private sector firms and stressed banks—raises more questions than has answers about where the needed investment capital will come from.
Which brings us to the third set of big numbers? The government’s own finances. The finance minister reiterated the government’s commitment to meeting its fiscal target by maintaining the fiscal deficit at 3.4 percent. However, the government’s capital expenditure—which is where the government’s share of investment comes from—doesn’t match the scale of overall envisaged investment. In the Budget, capital expenditure is estimated at Rs 1.6 lakh crore in 2019-20, an increase of 20 percent over the previous year. Is that going to be enough to revive economic growth? Unlikely.
The concerns on the expenditure side, however, are larger. Start with interest payments: they amount to over Rs 7 lakh crore, or over 30 percent of the entire Budget; interest payments are bigger than subsidies and defence spending combined. On the face of it, sticking to the fiscal deficit target constrains the government’s borrowing.
In 2016, then Finance Minister Arun Jaitley initiated a new Budget item—the use of Extra Budgetary Resources or EBR. This allows public sector enterprises to raise bonds on the strength of their balance sheets that would be serviced fully by the government, both interest and principal repayments. The EBR keeps a certain amount of government debt off the government’s books, so to speak, and is not included in calculating the fiscal deficit. At end-March 2019, the outstanding amount was Rs 88,454 crore or 0.5 percent of the GDP.
The Medium-Term Fiscal Policy Strategy Statement, one of the documents submitted to Parliament along with the other Budget documents, envisages the EBR at the end of FY20 to be 0.7 percent of the GDP, or roughly Rs 1.5 lakh crore. That means the EBR borrowing this year will be about Rs 60,000 crore. The fiscal policy statement, however, states that this instrument will not likely be used after 5 years. In public finance, temporary measures usually become permanent.
The Budget also suggests some new ideas (and revives a couple of old ones) about new financing instruments to raise investment capital, including the use of foreign currency government bonds. This is one area that the government has stayed away from all these years. Talk to any industrialist and he will probably say it’s a good way of attracting low-cost investment capital. A review of our external commercial borrowings might be instructive.
But the Budget ignored or glossed over one significant problem: who will manage the exchange rate risk? The government so far hasn’t created a public debt office, something that’s been in the works for several years. The RBI has performed the role of the government’s investment banker so far; even as the relationship between the two is undergoing a change, can the central bank be the government’s exchange rate risk manager? That is almost the dictionary definition of a conundrum.
Yes, the government has, on its part, announced the setting up of committees to examine and recommend courses of action and the way forward. That said, these processes by their very nature have to be carefully considered, thoughtful exercises. The government’s ambitions may not weather the vagaries of time very well; without the resources, how is the government going to realise them?
(The writer is a former journalist)
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