Advice as stimulus

PM does well to bring back the Economic Advisory Council

The decision to reconstitute the Economic Advisory Council (EAC) to the prime minister, which had been rendered defunct after the previous government demitted office in May 2014, is a welcome step. The move to bring back the EAC comes on a day when Prime Minister Narendra Modi was expected to announce an economic stimulus package. That the package did not materialise makes it apparent that the government has ignored several voices that called for a more lax fiscal policy. In that context, the formation of the EAC suggests that it could play a critical role in advising the prime minister on the route to take to revive the economy’s growth momentum that has slumped over the past few quarters. It also shows an acceptance by Mr Modi that the slump in the economy is serious enough to deserve urgent attention. The growth rate has been decelerating since March 2016 and fell below the 6 per cent mark in the last completed quarter. 

For a while the government appeared to be in denial about the economic slowdown as it expected a sharp “V-shaped” recovery after demonetisation. But as one data set after another has shown convincingly, the note ban in November last year aggravated the slump that had already set in. The government has tried to compensate for the fall in private investment and weakness in exports by ramping up government expenditure. However, the initiation of a new indirect tax regime, the goods and services tax (GST), has introduced another round of uncertainty in the economy. Since July, when the GST was implemented, the disruption due to the indirect tax has put the government’s tax revenues under strain as well, thus making it difficult for it to contemplate a massive counter-cyclical fiscal stimulus. According to official data furnished by the Controller General of Accounts (CGA), India’s April-July fiscal deficit — at Rs 5.05 lakh crore — stood at 92.4 per cent of the full year Budget target of Rs 5.46 lakh crore. The comparable figure over the same period in the last fiscal year was 73.7 per cent of the Budget estimate. 

In essence, what the CGA data reveals is that a fiscal stimulus has already been in the works since the government has tried to front-load its expenditure. However, even without any new fiscal push, analysts expect that the government’s fiscal deficit target is likely to come under pressure. Estimates by analysts suggest that the base case scenario would lead to a slippage of 26 basis points while a more bearish case could see the fisc slip by 75 basis points from its current Budget estimate of 3.2 per cent. The key reason for these is the uncertainty surrounding tax revenues, especially from the GST. The government has tried very hard to hold on to its fiscal targets over the years, even at the cost of angering the middle class over sustained increases in oil prices due to higher taxation. A slippage would also rule out a rate cut from the Reserve Bank of India. It is to be hoped that the EAC will suggest improvements in quality of expenditure as well as structural reforms in order to reboot growth.