Budget Reality Check: Dharmakirti Joshi, Chief Economist, CRISIL

The curtains on the eagerly awaited economic event of the country will be raised on July 10. India is waiting to see if Arun Jaitley’s maiden budget will nurse the economy into a robust state of health and usher promised good times. In an interview with CIO.in, Dharmakirti Joshi, Chief Economist, CRISIL, outlines the fiscal direction the government should take to claw back up the growth curve.

Where do you see the Indian economy heading in the short-term?

Given the current economic scenario, it will be quite difficult to move in the fast lane because there are several problems plaguing the economy including weak demand, high inflation, fiscal stress, and a narrow project pipeline.

Besides, it is not possible to revive the economy using typical short-term policy tools like cutting interest rates and increasing government spending, because we have a high-inflation and high-deficit environment. So, the only way to resuscitate the economy is through structural changes and de-bottlenecking. This will take some time to bear fruit.

In addition, there are two key material risks to the economy this year. One is the poor monsoons–that will impact growth and create inflationary pressures.

The second is the possibility of a spike in oil prices due to tensions in Iraq–that will hurt India’s growth, inflation and fiscal deficit.

So, in the short term, GDP growth will be better than last year, but the outlook has many risks to it. 

Is it possible to rein in inflation while pushing a growth agenda?

Yes. Of course. The government has to ensure that it does not create growth through inflationary methods by spending recklessly.

By doing that it will only increase the size of the fiscal deficit or use pump priming to stimulate growth. If you push growth up through increased fiscal spending, it will be inflationary in nature.

But if you try to fast-track growth through structural means then it will have a favourable impact on the fiscal health.

For instance, let’s take the implementation of Goods and Services Tax (GST). The impact of GST on tax revenues will be two-fold. By eliminating the cascading effect of multiple central and state taxes, GST will reduce the cost of doing business and increase profitability. This, in turn, will attract investments and ultimately help GDP growth.

Lower taxation and filing costs will also improve the price competitiveness of Indian goods abroad, boosting exports.

Second, by simplifying the tax regime, GST can significantly improve tax compliance and increase tax revenues. The growth that will come from the implementation of GST will therefore not be inflationary in nature.

The other measures are to make coal available to the power sector because right now it is a bottleneck.

Reviving the mining activities will also be a good step. These are non-inflationary methods of reviving growth, improving the business climate, reviving investor sentiment and stimulating growth. And these measures will not be inflationary.

But if you try to step up the pace of growth by cutting interest rates or through increased government spending then it will be inflationary in nature and will jeopardise long term fiscal health of the economy.

By when do you see growth reach the levels seen between 2003- 08?

What growth rate we will achieve will depend on the kind of reforms we will unfold. But over the next five years, it will average around 6.5 to 7 percent. And if you can clock that growth rate with a low level of inflation then I think that’s a good outcome.

As you keep strengthening the economy and keep investing in infrastructure, your ability to grow faster without generating inflation will improve and you could register 8-9 per cent growth. However, I do not see the visibility of such high growth in next 3-4 years.

What should the upcoming budget focus on to build a sound foundation for spurring growth?

The first is fiscal consolidation. You have to put the fiscal house in order through transparent budgeting and also ensure that there is medium term plan for bringing the deficit and debt rate down.

The best way to do this is to introduce GST. But it will be difficult to implement it immediately as it requires consensus among states. In the short run you need to get revenues from other sources like divestment etcetera in a very aggressive manner to ensure that fiscal deficit remains under control. This will create conditions for RBI to cut interest rates and promote growth.

Second, the government needs to improve the quality of its spending. It has to move its spending from subsidies towards investment. Government spending should be more in the capital or investment side rather than on subsidies. It has to tilt the balance of its spending in favour of investments.

The budget should act as a platform for the government to lay out its reform roadmap for the next few years. The road map should explicitly deal with reviving investments, improving the business climate, and share its inflation control strategy over the next few years. The road map should come out with a credible plan for revising India’s manufacturing sector and aim to create an environment of predictable and transparent taxation system.  

All these steps will lay the foundation for future prosperity of India. 

Private corporate sector investments have fallen quite sharply. Currently, they amount to 11 percent of GDP. How can the budget boost private sector investment?

The decline in private sector investment is due to both the economic cycle as well structural issues. Cyclical factors have led to a demand slowdown both in the domestic economy as well as the external economy. This reduces capacity utilization and discourages investments.

Unfortunately, we cannot increase demand by cutting interest rates or through increased fiscal spending as inflation is high and there is no fiscal leeway to spend as deficit remains high.

Reviving investment will also be dependent on acting on structural constraints such clearing projects that are stuck by reducing red tape, bringing clarity on the land acquisition process, and by transparent and quick environmental clearances. These steps will improve the private investment climate and build a pipeline of projects and revive private investments.

Which sector will be the focus area of the budget?

The focus of the budget is going to be on manufacturing, physical infrastructure, and social sectors, which need urgent attention. IT is anyway doing well.  

What do you expect this budget to be? Bold, visionary, play-it-safe, do-little or presaging new policy reforms.

I expect it presage new policy reforms.