You Have Heard the Good News About GDP, Here’s the Slightly Better News

The gross domestic product (GDP) figures for the period October to December 2020 were declared earlier in the day today. GDP is a measure of economic size of a country.

The good news is that the Indian economy is back on the growth path. It grew by 0.41% during the period. While the growth rate itself isn’t great, it comes on the back of six months of a covid led economic contraction. And that’s clearly good news.

But this bit most of you who follow the economy closely on the social media, must have already heard by now. So, let me give you some better news than this good news.

The Indian GDP is measured in two ways. One way is by adding up private consumption expenditure (the money you and I spend buying up things), government expenditure, investment and net exports (exports minus imports). If we leave government expenditure out of the GDP, what remains is the non-government GDP, which forms a bulk of the GDP. In the October to December period, it formed around 90.3% of the GDP.

For the GDP to grow on a sustainable basis, this part needs to grow. Given that the government is a small part of the Indian economy, it can only create so much growth by spending more and more money.

The non-government part of the GDP grew by 0.58% during October to December 2020, after contracting significantly during the first six months of the financial year.

What this tells us is that the private part of the economy recovered quite a bit during the period without the government trying to pump up economic growth. The government expenditure during the period was down by 1.13%. This is the slightly better news I was talking about.

The private consumption expenditure, which forms a major part of the non-government part of the GDP contracted by 2.37%, after having contracted much more, during the first six months of the financial year. This tells us that the consumers are gradually coming back to the market even though some apprehension still prevails. This apprehension is probably more towards going out and spending money in the services part of the economy.

The other important part of non-government GDP is investment. It grew by 2.56% during October to December, which is the best in a year’s time. For jobs to be created, this growth needs to be sustained in the months to come.

The other way of looking at size of the economy is to add up the value added by the various sectors. Of this, the services sector, from hotels to real estate to banking to trade to broadcasting to transport to public administration, form nearly half of the economy. And if economy has to get back on track, it is these sectors that need to get back on track. The services sector grew by 0.98% during the period, though this was better than the contraction seen during the first six months of the year.

Agriculture was the standout sector and it grew by 3.92% during the period. In fact, October to December is the biggest period for agriculture during the year and the sector has done well during its biggest quarter. On the other hand, manufacturing grew by 1.65%.

What this tells us is that the economy is gradually coming back to where it was before covid. It is worth remembering here that even before covid the Indian economic growth was slowing down. All in all, the real challenge for the Indian economy will start in the second half of the 2021-22, once the base effects of the covid led economic contraction are over. As I have said in the past, the economic growth rate during the first half of 2021-22 will go through the roof, but that will be more because of base effect than anything else.

Nonetheless, even with this recovery during the second half of the financial year, the Indian economic growth is expected to contract by 8% during 2020-21. This figure has been revised upwards. The Indian GDP was earlier expected to contract by 7.7% during the year.

The main reason for this lies in the revision of the government expenditure expected during the year. As per the first advanced estimate of the GDP for 2020-21 published in early January, the government expenditure for 2020-21 was expected to be at Rs 17.48 lakh crore. In the second advanced estimate published today, it has been revised to Rs 15.87 lakh crore, a cut of 9.2%.

From the looks of it, the central government is trying to cut down on the targeted fiscal deficit of Rs 18.49 lakh crore for 2020-21. Fiscal deficit is the difference between what a government earns and what it spends.

More Than Half of Govt Taxes Will Go Towards Paying Interest on Past Loans

As I keep saying, the union budget at its heart is the presentation of the financial accounts of the government or to put it simply, on what it plans to spend money on, during the course of a year and how does it plan to earn and arrange for that money.

Given this, a lot of analysis happens on the issue of what the government plans to spend money on, during the course of a particular year. A similar thing has happened this time around as well, with journalists, analysts and economists, digging into the budget in trying to figure out where exactly is the government planning to spend money in 2021-22 and where it has spent its money in 2020-21.

The trouble is that like previous years this year as well most analysis has missed out on the biggest expenditure item in the government budget, which is interest payments. Almost every government spends more than what it earns and the difference is referred to as the fiscal deficit. This deficit is largely financed through the government borrowing by issuing bonds. An interest needs to be paid on these bonds every year.

This interest is the largest expenditure in the government’s budget, even though it rarely gets talked about.

Take a look at the following graph, which plots the interest payments on the outstanding borrowing of the union government.

Source: Centre for Monitoring Indian Economy.
2020-21 – Revised estimate.
2021-22 – Budget estimate.

As can be seen from the above chart, the interest payments have been going up over the years and are expected to be at around Rs 8.1 lakh crore in 2021-22 . Now Rs 8.1 lakh crore on its own sounds like a large number, but just looking at the absolute number is not the right way to go about things in this case.

Let’s look at what proportion of overall expenditure of the union government have interest payments formed over the years.

Source: Author calculations on data from Centre for Monitoring Indian Economy.

As per this graph, interest payments in 2020-21 formed a little over one-fifth of total expenditure and this is an improvement on the situation that prevailed before. But this interpretation is wrong, simply because the overall expenditure of the government also includes money that it does not earn.

Hence, a government can always borrow more and spend more in a particular year leading to a higher expenditure number and thus, the interest payments as a proportion of overall expenditure will come down. But that doesn’t mean things have improved.

Let’s look at another chart. This plots the interest payments as a proportion of net tax revenue earned by the union government. Net tax revenue is what remains with the central government after sharing a certain proportion of the gross tax revenue (or to put it simply overall tax collections) with the state governments.

Source: Author calculations on data from Centre for Monitoring Indian Economy.

The above chart gives us a clear picture of the prevailing situation. In 2017-18, the interest payments formed 42.6% of the tax revenues earned by the union government. They have been rising since then and in 2020-21 and 2021-22 are expected to touch 51.5% and 52.4%, respectively.

What does this mean? It means that more than half of the government’s taxes are going towards paying interest on its outstanding loans, leaving very little money for anything else, unless the government earns money through other ways or borrows money or uses other ways to finance the fiscal deficit.

One way for the government to earn more money is through the sale of its stakes in public sector enterprises. In 2020-21, the government had hoped to earn Rs 2.1 lakh crore through this route. This turned out to be a very ambitious target and the government is now hoping to earn Rs 32,000 crore through this route during 2020-21.

The disinvestment target for 2021-22 has been set at Rs 1.75 lakh crore. It is very important for the government to earn this money else it will have to borrow more to meet the expenditure. This will mean higher interest payments in the years to come which will either lead to the government having to cut expenditure or having to borrow even more to meet the expenditure. More borrowing will lead to even more interest on the outstanding debt.

This will have to be paid by implementing higher taxes on the taxpayers and many of these taxpayers will be newer ones, just entering the workforce. This is precisely the way the current generation passes on its liabilities to the next one.

Also, as the outstanding debt matures and needs to be repaid, the government will have to borrow more to repay this debt. Hence, a greater proportion of the borrowing will just go towards repaying debt which is maturing. This will become a debt spiral and needs to be best avoided.

There is another thing that is happening and needs to be brought to notice. The government finances a major part of the fiscal deficit through borrowing. So, let’s take the case of 2020-21. The fiscal deficit for the year is expected to be at Rs 18.49 lakh crore.

A bulk of this deficit will be financed by borrowing Rs 12.74 lakh crore from the market. Where does the remaining money to fill the gap come from? A bulk of it comes from the small savings schemes.

The small savings schemes currently in force are: Post Office Savings Account, National Savings Time Deposits ( 1,2,3 & 5 years), National Savings Recurring Deposits, National Savings Monthly Income Scheme Account, Senior Citizens Savings Scheme, National Savings Certificate, Public Provident Fund, KisanVikas Patra and Sukanya Samriddhi Account.

The money coming into these schemes net of disbursements that happen during the course of the year, is used to finance the fiscal deficit of the union government.

This has been rising at an astonishing pace over the years, as can be seen from the following chart.

Source: Centre for Monitoring Indian Economy.

In 2012-13, the amount had stood at Rs 8,626 crore and it has since risen to more than Rs 4.80 lakh crore. While this amount does not end up as a debt of the government, it is a liability that the government does need to repay over the years.

Also, this is money that is coming from the public savings at the end of the day. In order to ensure that money keeps coming into these schemes, the government will have to continue offering a higher rate of interest on these schemes in comparison to bank fixed deposits.

Hence, the perpetual complaint of the bankers is likely to stay, given that the government needs this money to continue financing its high fiscal deficit. The other option is to borrow directly from the market and increase its outstanding debt figure, which the government wants to avoid beyond a point.

What this tells us is that all hasn’t been well on the government finances front over the last few years, and covid has only made it worse. One reason for this lies in the constant fall in the taxes collected by the government as a proportion of the gross domestic product (GDP), over the years.

The net tax revenue of the union government stood at 8.97% of the GDP in 2007-08. It has since fallen and was at 6.67% of the GDP in 2019-20. In 2020-21, it is expected to be at 6.90% of the GDP. The figure is higher in 2020-21 simply because of the size of the Indian economy, as represented by the GDP, is expected to contract more than the taxes collected by the government during the year.

This fall in tax collections and the dependence of the government on other ways of financing its fiscal deficit, also leads to the question whether the size of the Indian economy or its GDP, is being properly measured. Over the years, the informal part of the Indian economy has seen huge destruction and the question is, does this destruction reflect properly in the GDP figures being published over the years. This is a question well worth asking given that if the GDP is growing why have tax collections been falling?

To conclude, it does seem the government understands the financial situation it is headed towards. Hence, an ambitious target for disinvestment has been set. Over and above this, it also has plans of monetising physical assets including surplus land. Hopefully, this will take off soon. .

PS: Of course, you will not find this kind of analysis anywhere in the mainstream media or even digital publications which charge a fee. Hence, it is important that you support my work. You can do it here. 

“We have spent, we have spent and we have spent” – But Where Madam FM?

Those of you who read me regularly would know that I look at the government budget more as a statement of financial accounts and not much as an actual policy document, as many people do.

The reason is simple. The government has an opportunity to do right policy 365 days a year. But the annual budget numbers are released only once a year.

Keeping this in mind, in this piece I will look at the massive fiscal deficit that the union government will run this year and try to  analyse it in different ways and try connecting it to what it means for the economy as a whole and the ability of the government to spend money.

We will also look at whether the government is spending more money in order to get the economy going, as it has claimed to.
Let’s take a look at this pointwise.

1) The fiscal deficit for 2020-21 is projected to be at 9.5% of the gross domestic product (GDP). This is the highest fiscal deficit figure between 1970-71 and now (The fiscal deficit data is available in the Centre for Monitoring Indian Economy database from 1970-71 onwards). While this shouldn’t be surprising, the spread of the covid pandemic is not the only reason for it.

Fiscal deficit is the difference between what a government earns and what it spends and it is expressed as a percentage of GDP. Somehow, once expressed as a percentage of GDP, the fiscal deficit never sounds big enough.

In absolute terms, the fiscal deficit for this year is expected to be at Rs 18.49 lakh crore. Now that is one big number. Especially if you compare it to the fact that the fiscal deficit expected when the budget for this year was presented in February 2020, was Rs 7.96 lakh crore. The deficit turned out 132% more than what was forecast before the year began.

2) There is another interesting way to look at fiscal deficit. You might think that I am torturing numbers here and you are right to some extent, but I am only trying to show how big this fiscal deficit actually is.

Take a look at the following chart. It plots the fiscal deficit as a percentage of total government expenditure, over the years.

Source: Author calculations on data from Centre for Monitoring Indian Economy.

What does this chart tell us? It tells us that in 2020-21, the fiscal deficit as a percentage of government expenditure will be at 53.6%. This is the highest ever level. Hence, a bulk of the government expenditure during 2020-21 will not be financed by its earnings. This tells us how high the fiscal deficit really is.

3) The question is why has the fiscal deficit jumped to such a high level? The simple answer is that the government hasn’t earned the total amount of tax it had projected, thanks to the spread of the covid pandemic. Let’s start with the net tax revenue or what is left after the government has shared the tax collected with the state governments.

The government expected to earn a net tax revenue of Rs 16.36 lakh crore this year, when the budget for this year was presented in February 2020.  It now hopes to earn Rs 13.45 lakh crore. This is Rs 2.89 lakh crore or 17.8% lower. This explains a part of the jump in the fiscal deficit from an expected level of Rs 7.96 lakh crore to Rs 18.49 lakh crore. But it still doesn’t give us the complete story.

4) In 2020-21, the government expected to earn a significant amount of money by selling or disinvesting its stakes in public sector enterprises. The amount it expected to earn through disinvestment was Rs 2.1 lakh crore. It has now been revised to just Rs 32,000 crore or 15.2% of the expected amount. There is gap of Rs 1.78 lakh crore here and this has also majorly pushed up the fiscal deficit.

The government’s excuse for this is covid. While, that might have been true for the first half of the year, it just doesn’t work for the second half of the year, when the stock market has gone from strength to strength and the government could easily have divested its stakes in public sector enterprises.

The only possible explanation here is that the government, as usual, has moved very very slowly on the procedural formalities required to disinvest its stakes in public sector firms.

5) A lower tax collection of Rs 2.89 lakh crore and lower disinvestment receipts of Rs 1.78 lakh crore, still only add up to around Rs 4.67 lakh crore and doesn’t totally explain the huge jump in the fiscal deficit.

There is a third major reason. I write about it in detail here. And I urge you click on this link and read it. I will offer a short summary here. The Food Corporation of India (FCI) buys rice and wheat directly from farmers at a minimum support price announced by the government. It then sells this rice and wheat through the public distribution system at a much lower price, in order to meet the needs of food security.

The government has to compensate the FCI for this difference. It does that by allocating money towards food subsidy in the budget. Over the years, the money allocated towards food subsidy has never been enough. In 2019-20, the FCI ‘s food subsidy bill was close to Rs 3.18 lakh crore. The government gave it Rs 75,000 crore.

Much of this gap was filled by FCI taking on loans from the National Small Savings Fund, where all the money collected under the various small savings schemes, ends up. As of March 2020, the FCI owed NSSF Rs 2.55 lakh crore.

The accounting jugglery over the years, essentially helped the government to declare a lower expenditure and hence, a lower fiscal deficit.

The government has now decided to end this and take on the total food subsidy offered by FCI as an expenditure. Hence, in February 2020, when the budget for this year was presented the allocation of food subsidy to FCI had stood at Rs 77,983 crore. It has now been revised to Rs 3.44 lakh crore. In fact, the overall food subsidy has been increased from Rs 1.16 lakh crore to Rs 4.23 lakh crore. This is a good thing that has happened because ultimately the main aim of the government budget is to present financial accounts as correctly as possible.

This has added Rs 3.07 lakh crore  (Rs 4.23 lakh crore minus Rs 1.16 lakh crore) more to the government expenditure and hence, to the fiscal deficit as well. Hence, the three reasons discussed up until now increased the fiscal deficit by Rs 7.74 lakh crore (Rs 2.89 lakh crore + Rs 1.78 lakh crore + Rs 3.07 lakh crore). This still doesn’t explain the total difference.

6) Other than taxes and disinvestment, the government also earns money under the heading non tax revenue. This includes dividends that the government earns from public sector enterprises, public sector banks, financial institutions like the Life Insurance Corporation of India and the dividend from the Reserve Bank of India. It also includes many other ways of making money.

The non tax revenue that the government had hoped to earn this year was Rs 3.85 lakh crore and it ended up earning Rs 2.11 lakh crore, which was Rs 1.74 lakh crore lower. This was primarily on account a massive fall in dividends earned.

If we add this to the earlier Rs 7.74 lakh crore, we get Rs 9.48 lakh crore. The fiscal deficit went up from a projected Rs 7.96 lakh crore to Rs 18.49 lakh crore primarily because of these four reasons.

Three of these reasons, lower tax collections, lower disinvestment receipts and lower non tax revenue, are on the earnings side. And one reason, higher food subsidy is on the expenditure side.

7) The finance minister Nirmala Sitharaman in her post budget interaction with the media said the government has spent a lot of money in order to get the economy going. The Business Standard reports her as saying, we have spent, we have spent and we have spent. The logic here is that in an environment where personal consumption has slowed down and industrial expansion is not happening, the government has to become the spender of the last resort, in order to get the economy going again.

The business media today is full of headlines around the government spending its way out of trouble. But do the budget numbers really reflect that?

Let’s try and see what the numbers tell us. The total government expenditure budgeted for 2021-22 is Rs 34.83 lakh crore. This is just a little more than the Rs 34.5 lakh crore the government expects to spend this year.

Here’s the interesting thing. In 2021-22, the government expects to spend Rs 8.1 lakh crore on paying interest on its outstanding debt. Once we adjust for this, the total government expenditure in 2021-22 stands at Rs 26.73 lakh crore (Rs 34.83 lakh crore minus Rs 8.1 lakh crore).

In 2020-21, the government expects to spend Rs 6.93 lakh crore on paying interest on its debt. Once we adjust for this, the total government expenditure in 2020-21 stands at Rs 27.57 lakh crore (Rs 34.5 lakh crore minus Rs 6.93 lakh crore).

Hence, the year on year, overall government spending next year will actually come down and not go up. Having said that, the capital expenditure in 2021-22 is budgeted to be at Rs 5.54 lakh crore, which is 26.2% more than the Rs 4.39 lakh crore, the government expects to spend in 2020-21. This is some good news, but doesn’t deserve the emphatic spend, spend, spend, statement.

The extra Rs 1.15 lakh crore (Rs 5.54 lakh crore minus Rs 4.39 lakh crore) works out to 0.5% of the GDP projected for 2021-22. While something is better than nothing, it clearly isn’t much.

8) What about the current financial year? The government plans to spend a total of Rs 34.5 lakh crore. This is 13.4% more than the Rs 30.42 lakh crore it had planned to spend when it presented the budget. Once we adjust for the fact the food subsidies have been properly accounted for and that has added Rs 3.07 lakh crore to the government expenditure, the actual expenditure goes down to Rs 31.43 lakh crore (Rs 34.5 lakh crore minus Rs 3.07 lakh crore). This is around 3.3% more than the amount budgeted of Rs 30.42 lakh crore, at the time of the presentation of the budget.

In fact, if we look at the food subsidy paid during April to December 2020, it amounts to Rs 1.25 lakh crore. With the budgeted amount being at Rs 4.23 lakh crore, close to Rs 3 lakh crore of food subsidy still remains unpaid. This will be paid during the last three months of 2020-21.

This money has already been spent by FCI and other agencies during this year and years gone by. Once FCI receives this money, it will pay off the money it owes to NSSF. Hence, there is really no extra spending happening here.

9) Now let’s compare, the spending in 2020-21 with that in 2019-20. The total expenditure in 2019-20 had stood at Rs 26.86 lakh crore. Once we take the increase in food subsidies out, the total expenditure in 2020-21 stands at Rs 31.43 lakh crore (Rs 34.5 lakh crore minus Rs 3.07 lakh crore). The spending in 2020-21 is thus around 17% more than the last financial year. But much of it was budgeted for in February 2020, when the budget for this year was first presented.

Hence, the increase in spending in 2020-21, or the fiscal stimulus as economists like to call it, hasn’t been because of the covid pandemic, it was happening anyway.

To conclude, it is clear that the government is not spending more in 2021-22 on the whole, though there is some increase in capital expenditure and that’s good. In 2020-21, the government has actually spent more, but then much of it was planned before covid and not after it.

It also tells us that once we take the real fiscal deficit into account, there isn’t much that the government can do to spend its way out of trouble. The good thing is that the government has decided to clean up its books. And that will have repercussions on the total amount of money it is able to spend during the course of this year and the next. The mistakes that we make in our past always come back to haunt us.

Dear Reader, clearly this piece should tell you how nuanced numbers can get, if one decides to dig a little deeper. Of course, you won’t get such a nuanced reading of the budget numbers anywhere in the mainstream media.

Hence, it is important that you continue supporting my work.

Raghuram Rajan’s 10 Solutions to Get Economy Going Again

Summary: This one is for all of you, where are the solutions wallahs. Of course, I have offered many of the solutions that Rajan has offered in a column, but never put them together in one place.

One of the perils of writing on the Indian economy in the last six years has been the repeated comment from a few, don’t tell us about the problems, but give us the solutions. I mean how do you discuss solutions without highlighting problems. How do you come up with a prognosis without coming up with a diagnosis in the first place?

It’s not that one hasn’t highlighted solutions in what one has written over the years, but it’s just that where are the solutions wallahs, don’t seem to notice them. This belief that economics has solutions to everything (particularly among the non-economists, which means most of us), is very strong.

Over the years, I have come to believe that this is primarily because almost all of us are brought up writing exams where every question has an answer and every problem (in the mathematical sense of the term) has a solution. Life and economics don’t work like that. If everything had a solution, the word problem wouldn’t exist in the first place.

Nevertheless, this piece is all about solutions; things that the central government can do right now (and should have been doing by now) to get the economy going again. I have just finished reading Dr Raghuram Rajan’s piece on the Indian GDP (Gross Domestic Product) collapse. GDP is a measure of the economic size of a country.

Dr Rajan, who was the governor of the Reserve Bank of India (RBI), has offered many solutions. These are things that the government can do to get the economy going again. I have offered many of these solutions in my writing as well, though never gotten around to writing about all the solutions together at one place.

Let’s take a look at these solutions, one by one.

1) The government needs to expand its resource envelope in every way possible, Rajan writes. At the cost sounding like a broken record, it needs to sell its stakes in many public sector enterprises (how many times have I said this). In fact, in a sense it has already missed out on the current buoyant state of the stock market. The total amount of money collected through the disinvestment route during this financial year, remains close to zero.

Rajan also suggests that the government should be ready for on tap sale of its stakes in public sector enterprises, to take advantage of every period of market buoyancy.

2) Many public sector enterprises own land, in prime areas of India’s cities. And this land needs to be sold (Again, how many times have I suggested this). In fact, in a city like Ranchi, where I come from, the Heavy Engineering Corporation (a public sector enterprise) sits on acres and acres of government land. All this land across all these companies needs to be sold and money be raised. Of course, this isn’t going to happen overnight.

But that’s not the point here. If the government shows serious intent on this front by announcing a time-table to do this, as well as making preparations for the sale, this is something that the bond market will notice and be happy about.

3) Why is it important to keep the bond market happy? With tax collections collapsing by 30%, between April and July 2020 in comparison to the same period in 2019, it is but natural that the government will end up borrowing more. This is likely to push up the return (or the yield) that the market demands on the government borrowings, given that there is only so much financial savings going around. Other factors that will give confidence to the bond market is the publishing of the correct fiscal deficit numbers unlike the massaged numbers that are currently declared (well, well, well, I have been saying this for a couple of years now). Fiscal deficit is the difference between what a government earns and what it spends.

Another important reform suggested by Rajan is the setting up of an independent fiscal council, which can keep an eye on the deficit numbers (This is something that the former deputy governor of the RBI, Viral Acharya, has also been suggesting).

All in all, the government should seem like making serious moves towards restoring fiscal stability, which is currently lacking.

4) The world will recover faster than India, given that the covid-curve has been flattened across large parts of the world. Given this, economic demand in many of India’s bigger trading partners will recover faster than in India (Again, a point I made in a piece I wrote for the Mint on September 7, 2020). This means that faster exports growth can be a way for India to recover, suggests Rajan. But the trouble is that we are looking at import substitution as a policy more and more and imposing tariffs on imports. This raises the cost of inputs that go into goods that are ultimately exported.

Of course, the intermediary goods that go into the making of goods that are exported, can be produced in India, but this will happen at a higher price. Hence, this makes us uncompetitive at the global level (A point I made in a piece I wrote for the Mint in February). Also, reversing the entire import substitution bogey will mean going against the current atmanirbharta campaign, a very successful perception management campaign. (In economics, just because something sounds good, doesn’t mean it is necessarily good). Economics is not the only thing that any government is bothered about.

5) Rajan suggests that the focus on Mahamta Gandhi National Rural Employment Guarantee Scheme (MGNREGS) as a way of putting money directly into the hands of the poorest, should continue. If this means spending more money under the scheme, then so be it. (Okay, I had suggested this as far back as March in a piece I wrote for the Mint, even before the government had taken this route.)

6) While, MGNREGS takes care of the lack of economic activity in rural areas, the urban areas get left out under the scheme. Hence, the government should be making more efforts to put money into the hands of the urban poor, suggests Rajan.
One of the things that the government has done is to put Rs 1,500 over a period three months into female Jan Dhan accounts. This cost the government around Rs 31,000 crore. I think it is time to put money into male Jan Dhan accounts as well (Again, I have been saying this for months now). This will take care of the urban poor to some extent. I know this isn’t the perfect solution because proper targeting will continue to remain a problem, but it is better than doing nothing.

7) Rajan further suggests that the government and public sector enterprises should clear their dues as fast as possible. This will put more money into the economy and particularly into the hands of corporations and help them survive. (Something I had said in March). A newsreport in The Financial Express today points out that the total amount of money owed by the central government and the public sector enterprises, amounts to Rs 9.5 lakh crore, or a little under a third of the Rs 30.4 lakh crore that the central government plans to spend this year. Of the Rs 9.5 lakh crore, Rs 2.5 lakh crore is owed to the Food Corporation of India (FCI). The remaining Rs 7 lakh crore is a large amount on its own. Even if a portion of this is cleared, the economy will get some sort of a stimulus.

As far as a real stimulus goes, focusing on physical infrastructure is the need of the hour, leading to creation of demand for everything from steel to cement. One area that can really get the Indian economy going again is real estate. I have discussed this so many times before. But for that to happen, so many other things need to happen, including many of the current real estate firms going bust and banks losing a lot of money. Creative destruction needs to be unleashed. Of course, the deep state of Indian real estate is not ready for something like this and will not let it happen.

8) Rajan also suggests that firms below a certain size could be rebated the income tax and the goods and services tax, they paid last year (if not the whole amount, but at least a part of it). This could be an easy and direct way of helping smaller businesses, which have faced the brunt of the pandemic all across the world. (Okay, I haven’t suggested anything like this anywhere, from what I remember).

9) Rajan recommends that public sector banks need to be properly recapitalised as the extent of losses due to covid are recognised. I feel that if the government doesn’t have the money to do so, then it needs to let these banks raise money from the market and in the process, the government should be okay with the idea of diluting its stake. (I have written a book on this )

10) And finally, as the moratorium on repaying loans taken from banks and non-banking finance companies has come to an end, there are bound to be defaults. Here, the government should have a variety of structures in place to deal with the emanating problems, and not have a one size fits all approach. Also, in my opinion, dilution of the entire insolvency and the bankruptcy process, is really not the right way to go forward.

So, to all the where are the solutions wallahs, these were 10 solutions that Dr Raghuram Rajan has offered to the government (Actually, there are more solutions in the piece he has written, but I have stopped at ten. Some of these solutions are about land reforms, labour reforms, genuine ease of doing business reforms, etc., to improve India’s competitiveness, which keep getting made endlessly over and over again). Rajan has also said that the time to do these things is now and not wait for things to get worse.

In my writing over the last few months, I have recommended eight or nine of these solutions as well, though never put all these solutions at one place. One important solution that I think needs to be quickly implemented, is a reduction of the goods and services tax on two-wheelers.

The trouble is that most of these solutions need money to start with. And for that the government needs to come out of its comfort zone and start raising money in ways that it has never done before (like selling land). Also, all reforms need intent and communication clarity to be able to explain these things to the junta at large. Plus, they may not lead to electoral gains immediately, something like a focus on an actor’s suicide may.

You see the government just doesn’t have the incentives to do the right things.

PS: I sincerely hope this should satisfy the appetite of all the where are the solutions wallahs, out there.

Winter and Money Printing are Coming to India, In a Few Months

The Controller General of Accounts publishes the state of government finance at the end of every month. This data is published with a gap of one month. Hence, on 31st August, the data as of 31st July, was published.

This data, not surprisingly, doesn’t make for a good reading. The fiscal deficit, the difference between what a government earns and what it spends, for the period April to July 2020 stood at Rs 8.21 lakh crore. The fiscal deficit that the government had plans to achieve during the course of the current financial year (2020-21) stands at Rs 7.96 lakh crore. Hence, at the end of July, the actual fiscal deficit of the government was 103.1% of the budgeted one.

But given the state we are in this is hardly surprising. Nevertheless, there are several reasons to worry. Let’s take a look at it pointwise.

1) Tax collections have collapsed. Between April and July 2020, the gross tax revenue, which brings in a bulk of the money for the central government and which it shares with the state governments, is down 29.5% to Rs 3.8 lakh crore, in comparison to the same period in 2019.

Let’s look at the different taxes collected by the government between April and June this year and the last year.

They all fall down

Source: Controller General of Accounts.


As can be seen from the above chart, the collections of all major taxes are down big time.

Take the case of central goods and services tax. (GST) or the part of GST that ends up with the central government. During April to July 2019, the total collections of the central GST had stood at around Rs 1.41 lakh crore. During the same period this year the collections have fallen by 34% to Rs 92,949 crore. Other taxes have fallen along similar lines.

The fall in GST collections is a reflection of a massive slowdown in consumption. A slowdown in consumption ultimately reflects in a slowdown in income of individuals as well as incomes of companies. Ultimately, one man’s spending is another man’s income.

But there is something that the above chart does not show, the excise duty collections of the central government. They are up year on year by 23.8% to Rs 67,895 crore. This despite the fact that the consumption of petroleum products between April and July is down 22.5% in comparison to 2019.

So, how have excise duty collections gone up? The central government has increased the excise duty on petrol from Rs 22.98 per litre to Rs 32.98 per litre. The excise duty on diesel has been raised from Rs 18.83 per litre to Rs 31.83 per litre. Also, a substantial part of this duty is a cess, leading to a situation where the central government does not have to share the revenue earned through the cess with the state governments.

In the process, the central government has captured a bulk of the fall in oil prices.

2) As mentioned earlier, the central government needs to share a part of the money it earns with state governments. Between April and July it shared Rs 1.76 lakh crore with states, against Rs 2 lakh crore, during the same period last year. This is 12% lower, during a time when the states are at the forefront of fighting the covid-epidemic.

The ability of the state governments to raise taxes, after having become a part of the goods and services tax system, is rather limited. Take the case of petrol and diesel. The central government has raised excise duty by such a huge extent that the state governments aren’t really in a position to raise the value added tax or the sales tax on petrol and diesel, which they are allowed to charge, without having to face political repercussions for it.

3) The central government has more ways of raising money than the states. One such way is disinvestment of its stakes in public sector enterprises. This year the government plans to earn a whopping Rs 2.1 lakh crore through this route. The original plan included the plan to sell Air India. Whether that happens in an environment where the airlines business has been negatively rerated in the aftermath of covid, remains to be seen.

The other big disinvestment plan was that of the government selling its stake in the Life Insurance Corporation of India through an initial public offering. There are one too many regulatory hurdles that need to be removed, before a stake in India’s largest insurance company can be sold to investors. Long story short, it looks highly unlikely that the government will get anywhere near earning Rs 2.1 lakh crore this year, through the disinvestment front.

Having said that, the government can always resort to some accounting shenanigans, like getting one public sector enterprise to buy another, and pocketing that money. This is likely to happen in the second half of the year.

Over and above this, the government earns a lot of money from the dividends that it earns from public sector enterprises as well as banks and financial institutions. The target for this year is around Rs 1.55 lakh crore. Public sector banks will continue to remain on a weak wicket through this year, hence, their ability to pay dividends is rather limited.

The only way the government can make good this target is by raiding the balance sheet of the RBI for money. Also, the government is likely to raid the cash balances of public sector enterprises which have them, by asking them to pay special dividends.

4) The money that gets invested into various small savings schemes, which includes schemes like Post Office Savings Account, National Savings Time Deposits ( 1,2,3 & 5 years), National Savings Recurring Deposits, National Savings Monthly Income Scheme Account, Senior Citizens Savings Scheme, National Savings Certificate ( VIII-Issue), Public Provident Fund, KisanVikas Patra and Sukanya Samriddhi Account, net of the redemptions, is a revenue entry into the government budget.

This time it has been assumed that the government will get Rs 2.4 lakh crore through this route. Between April and July, Rs 38,413 crore or just 16% of the targeted money has come in. Last year, during the same period, 38% of a much lower target of Rs 1.3 lakh crore had been achieved. Clearly, this target is also going to be missed.

5)  Of course, the government understands this and which is why in early May it increased its borrowing target from Rs 7.8 lakh crore to Rs 12 lakh crore, by more than 50%. The government borrows money to finance its fiscal deficit.

What this means is that the government wants to at least keep the fiscal deficit to around Rs 12 lakh crore. The question is will that happen? Gross tax revenues are already down 30%. Of course, as the economy keeps opening up, this number will look better. Having said that, even if tax revenues are down by 15% as of the end of the year, we are looking at a shortfall of Rs 2.5 lakh crore for the central government. The other big entries of disinvestment and the net-revenue from small savings schemes, are also looking extremely optimistic in the current situation.

Even if the government achieves a fiscal deficit of Rs 12 lakh crore and the economy shrinks by around 10% this year, we will be looking at a central government fiscal deficit of 7% against the targeted 3.5%.

In this scenario, it is now more than likely that the RBI will resort to direct financing of government expenditure by printing money and buying government bonds. The government sells bond to finance its fiscal deficit.

This isn’t to say that the RBI hasn’t printed money this year. It has. But it has chosen to operate through the primary dealers. But the mask might come off in in the time to come and the RBI might decide to buy bonds directly from the government.

Winter and money printing are coming to India, in a few months.