The timing could not have been more ironic. Weeks after Prime Minister Narendra Modi announced his intention of winding up the Planning Commission — that ‘Soviet-era’ legacy which epitomised big government and state-led investments, and whose dismantling would presumably pave the way for a new era of private investment-led growth — his chief economic advisor struck a somewhat different note. Arvind Subramanian said that for growth to revive, the government has to step up to the crease, and start investing. In its mid-year review of the economy released on Friday, the Finance Ministry’s economists have said that it was “imperative to consider the case for reviving public investment as one of the key engines of growth going forward, not to replace private investment but to revive and complement it.” Yes, the private sector may not be in good enough shape to drive investments, with the borrowing spree during the boom years drowning corporate balance sheets in a sea of debt. But then the government is in no shape to step into the breach. For the ongoing financial year, the analysis has admitted that revenue receipts are likely to be short of Budget estimates by over ₹1 lakh crore. The analysis blames overestimation of revenue growth, as well as overoptimistic growth projections.
Though the current dispensation can blame (and has blamed) the previous government for “legacy bills” which it has to pay, it can hardly claim that it has been blindsided. It was no secret that tax collection projections were overly optimistic, given the sluggish growth, the sharp fall in investment and capital formation, and the sharp moderation in inflation. Tax revenue growth projections of 20 per cent made by the UPA were criticised by the BJP as over-ambitious, yet Finance Minister Arun Jaitley retained that number in his budget. He also chose to retain his predecessor’s fiscal deficit target of 4.1 per cent of GDP, a target he has stressed that the government is bent on achieving. That will mean raising additional resources or massive cuts in expenditure, mostly in productive investments under the Plan expenditure head, since the bulk of non-Plan expenditure, like defence, petroleum and food subsidies, and government salaries and pensions, are simply not cuttable. This would be precisely the kind of ‘pro-cyclical’ spending cuts which the analysis criticises the previous government for doing, and which it rightly says accentuated the growth slowdown.
But understanding the problem is pointless if no attempt is made to find solutions. As the review suggests, the government could consider revisiting its medium-term fiscal policy, and switch to a Keynesian model of spending-led growth. But this can happen only if it has the fiscal elbow room to spend. Fixing the broken PPP model, and reviewing unproductive social sector expenditures would be a start. Reforming land acquisition laws and reviving stalled projects would certainly help. But speeding up PSU divestment is critical. Of the revised target of ₹58,425 crore this fiscal, it has realised only ₹1,700 crore so far, with less than four months remaining. Add the ₹45,000 crore expected from spectrum auctions which are yet to take place, and the hole gets even bigger. The economy cannot afford more delays on this front.