Budget for it
The government should undertake some scenario planning so as to be prepared for the future
Given that the economy is unlikely to recover momentum in the short run, the pressure on the government to come out with more stimulus packages is certain to increase — a second stimulus package is expected any day now. The flood of bad news that is expected in the form of third quarter corporate results in January will also need to be countered psychologically. While preparing for more packages, and as more industries come under strain — especially the employment-intensive ones in the export sector — the government would do well to undertake some scenario planning so as to be prepared for what could be in store.
It should be obvious, for instance, that a large part of the current stimulus comes from not the last package announced by the deputy chairman of the Planning Commission, but from the increased spending on account of fertiliser and petroleum subsidies, and the farm loan waiver. The extra spending on these accounts, equal to perhaps as much as 4 per cent of GDP, will almost certainly not be required next year, given that oil prices are unlikely to rise in the midst of a global recession. That creates elbow room for the government to undertake more fiscal pump-priming.
While there will be a need to boost government expenditure, strain on the fisc will also be felt on the revenue side of the Budget. Tax collections are likely to remain low, and the tax buoyancy of the recent years of rapid growth (manifested in an increasing tax-GDP ratio) will be reversed to some degree. The slowing of growth rates will also put state government budgets under strain, something that has not been the case for the last two or three years. The combination of these factors could give rise to a sharp increase in the combined government fiscal deficit, with the Centre alone accounting for perhaps 4 per cent of GDP in 2009-10 (compared to the Budget figure this year of 2.5 per cent). This should not be a matter of great worry in a downturn, because fiscal policy is supposed to act in a counter-cyclical manner and be expansionist when there is a slowdown. The problem is that the deficit was not wiped out in the good years, thus leaving less room now for additional pump-priming.
The scenario-mapping should of course consider the possibility of growth being anywhere between 5 per cent and 7 per cent, though some estimates go even lower. The extent of pump-priming required will vary, depending on how well or badly the system does. A call will also have to be taken on the month or quarter by which the monetary measures taken so far will take effect; if it is the October-December quarter, then the real challenge is to deal with the first half of the year. Unfortunately, no Budget is likely to be presented to Parliament before June-July, so any indirect tax changes considered necessary will be delayed. All the more reason to think ahead now, rather than leave things for later. It is important to bear in mind that there could be a political vacuum in the run-up to the elections, and uncertainty after the results are known. Planning for next year (which would have been done by this time as part of the Budget-making process) should be done anyway, even if there is to be only a vote-on-account in February.