Dismal show by industry invites call for fiscal boosters

Chambers seek reconfiguration of public expenditure, creation of bankable projects.

As dismal growth numbers and high fiscal deficit bring in melancholy to the economy, voices for fiscal stimulus are gaining crescendo. Industrial production registered a shocking negative growth of 5.1 per cent in October, while manufacturing declined by 6 per cent. All this, when the fiscal deficit has touched 6.7 per cent of the GDP in the first half of the financial year. That triggers a trick question: how can we balance the GDP growth target of 7.5 per cent along with the fiscal deficit target of 4.6 per cent or 5 per cent of the GDP?

As reforms seem to be stalled or not moving expeditiously, and the Centre’s finances are going haywire, what are the options before the government to boost the industry? Madan Sabnavis, chief economist with CARE Ratings, says that government needs to now follow the Keynesian model to boost growth through public spending and forget about fiscal deficit target for now. “The government is the only entity that can spend right now. As inflation is easing, it can take that bold step to boost infrastructure spending,” notes Sabnavis. Higher fiscal deficit at 5-5.5 per cent is “all right”, but growth is becoming a “major concern”.

Ficci secretary-general Rajiv Kumar concurs. “It is high time the government incentivised investment,” he says. “It has to restore the fiscal stimulus by making the necessary fiscal space.” This will require a reconfiguration of public expenditure, he says and adds, “That should be done now”. The negative growth in capital goods sector is “indicative of declining investments” in the manufacturing sector. “This is going to have serious repercussions for the economy.” Others say there is no scope for fiscal stimulus. Logic: the first seven months of 2011-12 saw the Centre’s fiscal deficit having already consumed over 70 per cent of the whole year’s target. They want the government to put infrastructure clearances on fast track.

The Confederation of Indian Industry (CII) wants the government to create bankable projects. “Urgent measures are required to induce investments,” says the chamber’s director-general Chandrajit Banerjee. “These include creating a shelf of bankable projects, particularly in infrastructure. You have to identify the top 100 investment projects in the country...you have to take them forward with a monitoring mechanism instituted at the Centre.”

Banerjee calls for improving the fiscal situation. This, he says, will help ease the effective rate of interest, thus create a taxation environment that is conducive for investments. “The industrial slowdown is taking very serious dimensions,” he notes. “There is an urgent need to improve sentiments if the downward trend has to be checked.”

Pronab Sen, principal advisor to the Planning Commission, says the government should aim for disinvestments to meet the fiscal deficit target. Anis Chakravarty, director of Deloitte, Haskins and Sells, reiterates Sen’s views on increasing disinvestment.

“The government,” he adds, “needs rationalisation of subsidies. It must discontinue with the populist measures.”

The government has targeted Rs 40,000 crore from disinvestment for the current fiscal, but it has so far mopped only over Rs 1,000 crore.

Sen says increasing expenditure for the government is “not really an option” to curb inflation. “Let’s hope inflation starts coming down, as the demand has already started easing,” he notes. The government’s fiscal and monetary policy measures need to move in tandem, he adds. This means a further monetary tightening, which Sen has prescribed, cannot make fiscal policies expansionary. In other words, his advice is against stimulus.