Sanjeev Ahluwalia | Export, monetise, privatise: The eco mantra India needs

In India, the Union government takes on a much broader fiscal mandate than is necessary. Some of this is driven by the constitutional allocation of tax mandates, which favour tax flows to the Union government. Nearly 20 per cent, on an average, of a state government’s revenue flows in a “waterfall arrangement” from the Centre to the states, with a trickle reaching the local governments.

But the real incentive for the Union government to remain omnipresent in each and every aspect of a citizen’s well-being is the fear of missing out (FOMO) in citizen loyalty — out of sight, out of mind being a fact of realpolitik. This fear is the natural consequence of all elections — national, state or local government level — being fought in the name of the topmost leader in each party, a non-starter in a population of 1.4 billion, which is likely to grow to 1.9 billion in three decades.

The deeply centralising power of the social media worsens this trend.
The good news is that despite the hoopla of centralised governance, the economy is mutating away from the government and towards the private sector. The share of different economic agents in gross value added (GVA) is a good metric for tracking structural economic changes. If the share of general government grows over time, it would be a worrying development, because governments doing more that they need to create systemic inefficiencies.

One pervasive negative outcome is the crowding out of private entrepreneurs, resulting in lower growth, productivity and employment as accompanying negative consequences. Lean governments doing the least they are required to, via efficient regulation of private markets, is a proven option for enhancing system efficiency.

National Accounts data (second advance estimates for 2022-23) shows that India has healthy trend metrics on this score. Private corporations increased their share in Gross Value Added (GVA at basic prices) from 34 per cent in 2011-12 to 38 per cent 2021-22 at the expense of a reduction in the share of General Government, including state-owned corporations, from 21 per cent to 18 per cent, and House Holds, including Non-State Service intermediaries, down from a share of 46 per cent to 44 per cent. A progressively smaller government and increasing formalisation of the economy (via incorporation of businesses) is good for growth.

Within the total share of corporations in GVA, private corporations expanded their share from 76 per cent to 83 per cent, while the share of publicly owned corporations declined from 24 per cent to 17 per cent — an illustration of the growing strength of private markets and corporations. In 2011-12, the private sector share in non-financial corporations was already dominant at 80 per cent. But by 2021-22, even in financial corporations, the private sector share was 57 per cent, growing from 47 per cent in 2011-12.

These metrics illustrate a favourable trend of structural change in the economy. The current fiscal year is the first in which real GDP in all four quarters shall exceed the corresponding 2019-20 levels. Anticipated growth (current fiscal year over 2019-20) at around seven per cent of GDP shows that the dark legacy of Covid-19 is behind us. Future growth in the 6-to-7 per cent band is a cheery proposition, in a world seemingly heading for recession, though it does beg the question as to how we propose to pull off this feat. Stimulating domestic demand remains the key since external demand is likely to face constraints over the next two years.

One way of boosting demand is to cut tax rates and leave more cash in the pockets of consumers. The finance minister has done this at both ends of the taxable income spectrum though the relief is tangible only at the top. A more meaningful, across-the-board relief is possible only if the government jettisons the poorly targeted “nanny government” subsidies and benefits. Redirecting its firepower to boost incomes directly in the bottom two quintiles will require eschewing national programmes which compete with what states provide on their own initiative.

Such Central largesse is tolerable for small, special-category states in the border areas. But a moderation of Central outlays in mainline states is necessary to align with the target of fiscal deficit (FD) of 4.5 per cent by 2025-26 from the 5.9 per cent targeted this fiscal — a compression of 1.4 percentage points over two fiscal years equal to Rs 5 trillion of incremental income or forgone expenditure.

Over the past half century there have been three episodes of fiscal tightening of comparable magnitude. The most recent one was after the Covid-19 pandemic. FD was reduced by 2.46 percentage points in 2021 and 2022. After the Western financial crisis, FD was tightened by 1.66 percentage points in fiscal years 2010 and 2011. In fiscal years 1995 and 1996, FD was tightened by 1.85 percentage points. The 1996 fiscal compression was followed by a general election, which P.V. Narasimha Rao’s Congress government lost. An unpleasant precedent for today’s fiscal hawks who face an election in 2024.

FD compression is likely to slip in 2024-25, the election year, with the heavy lifting left for the new government. Other options are clever financial engineering which masks the real deficit. But finance minister Nirmala Sitharaman has already taken a hard line against fiddling with accounting principles. The National Monetisation Pipeline was supposed to deliver Rs 6 trillion in non-tax revenue over four years — 2021-22 to 2024-25. The target was overachieved in the first year, but inflows have lagged subsequently as the low hanging fruits get used up.

Proceeds from the sale of government equity languish at an average annual receipt of less that Rs 0.5 trillion since 2014-15 barring a single salutary year 2017-18 when they were Rs 1 trillion. The preference for politically costless reform limits the scope for fiscal manoeuvres. Getting the FD under control is also necessary for containing the current account deficit, which is set to more than double over the minus 1.2 per cent of GDP clocked last year, putting pressure on the rupee, that remains under threat from the continuing increase in US interest rates. Unlike America’s Federal Reserve, the Reserve Bank of India is charged with maintaining monetary stability and growth.

A dual mandate, which makes a decoupling from the trend of US interest rates possible. But only once the current account deficit moderates and inflation slows towards five per cent. Till then, growth will bear the consequences of hardening interest rates. Export, monetise and privatise is the motto India should be playing to.

The writer is adviser, Observer Research Foundation