From Demonetisation To Disinvestment: Can The Government Go For Another Big Bang?

There is a general consensus that a well-intended demonetisation scheme has hurt short-term economic growth due to its poor implementation as well as many unforeseen challenges. The Economic Survey tabled in the Parliament today (31 January) has projected Gross Domestic Product (GDP) growth at 6.5 per cent for the current year, which is below the Central Statistics Organisation’s (CSO) estimate of 7.1 per cent and sharply down from last year’s 7.6 per cent.

Now that the dust around demonetisation has settled, it is time to utilise the Union Budget to help the affected people, revive business sentiments and boost economic growth. Many commentators have argued in favour of increasing public investment in infrastructure, especially with a focus on job creation. There are also calls for introducing universal basic income (UBI) to help ordinary people, who have borne the brunt of demonetisation. On the latter, the survey makes it clear that a UBI is not on the agenda of the government. What is being analysed, though under the same name, is actually a targeted cash transfer aimed at 75 per cent of the population, which is roughly the same coverage as the United Progressive Alliance’s (UPA) food security law. Of course, it is unlikely that this year’s budget will actually implement such a policy even though there may be some promises.

However, an increase in public spending alone, whether for investment (infrastructure) or consumption (cash transfer), would lead to a sharp rise in the fiscal deficit. Not too long back, in 2008-09, similar demands were made in the aftermath of the global recession and the then finance minister Pranab Mukherjee went for a massive fiscal expansion. It did revive growth as an immediate consequence but also led to a burgeoning fiscal deficit. Sovereign rating downgrades promptly followed. It also generated an inflationary spiral which took us more than five years of efforts and some good luck to gain control over. The government should definitely avoid a rerun of that episode.

What are the options then?

Through the demonetisation scheme, the government has shown that it is not shy of announcing big bang measures. Now is an opportunity to show the same spirit in raising revenues rather than build up debt. While indirect tax revenues will certainly be higher this year, the jury is out on how much of gains will come from taxing the black income that have flowed into bank deposits. We may get a full picture only after the tax returns are scrutinised and recoveries are made. As for the upcoming budget, one of the areas that offers scope for raising revenues is the forgotten theme of disinvestment. The NITI Aayog has already recommended names of around 50 Public Sector Undertakings (PSUs) for divesting stakes in but the government has not followed through. During 2015-16, the government targeted disinvestment income of Rs 69,500 crore but managed to collect only Rs 25,312 crore. This year the aim was to raise Rs 56,500 crore out of which reports suggest that only half has been realised so far.

It is not only a matter of realising revenues, but the government can use this temporary crisis created by demonetisation as an opportunity to get out of running businesses that are not in the nature of public goods or have security aspects. This will help to unlock value in the units and enhance their efficiency. Even public sector banks are in dire need of private capital, but neither the recommendations of the Banks Board Bureau have been implemented, nor has the Indradhanush plan been implemented. The survey has recommended setting up a bad bank to reduce non-performing assets and bring PSU banks back to health. It would not be a bad idea to go one step further and reduce government stakes in PSU banks below 51 per cent to infuse market discipline in some of the inefficient institutions.

A resulting rise in revenues will help the government to contain the fiscal deficit within 3.5 per cent of GDP (the same as last year’s budgeted figure) even while increasing expenditure. In fact, the FRBM review committee chaired by N K Singh that submitted its recommendations on 23 January is reported to have advocated a fiscal deficit range or a flexible target with escape clauses. The Economic Survey has asked for a modified FRBM Act to provide fiscal policy direction for “the India of tomorrow”. A range or escape clause on fiscal deficit target would be helpful in providing elbow room for expansionary fiscal policies during short term downturns such as now. At the same time the Union Budget should also set a definite timeline to bring down the revenue deficit to zero.

Economic Outlook

The global macroeconomic scenario is starting to look up. The US economy appears stronger than a year back. The World Bank has forecast a higher global growth in 2017. Our exports have started picking up since December although the survey has warned against a global rise in protectionism. Of course, the main engines for India’s growth will continue to be consumption and investment. The government can use the higher revenues from taxes and disinvestment proceeds to ramp up spending on infrastructure.

A key part of the allocation should be towards strengthening the digital economy. This can cover connectivity, data infrastructure and increasing usage of electronic payments so that the momentum gained in the move towards digital payments is not dissipated. The survey has rightly said that the move towards digitisation should now happen, based on incentives rather than controls. Finally what is important is not just the budget proposals on the above fronts but also the implementation, execution and monitoring. The budget announcements and follow up actions can provide a definite fillip to GDP growth in financial year 2018 without compromising on fiscal discipline.