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Informist, Monday, Jan. 20, 2025

 

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--NR Bhanumurthy: Govt must revert to FRBM Act, cap capex at 3% of GDP
--CONTEXT: Comments by economist NR Bhanumurthy in interview
--NR Bhanumurthy: Limiting govt capex at 3% of GDP to aid pvt capex recovery
--NR Bhanumurthy: Taxes are likely eating into urban consumption capacity
--NR Bhanumurthy: Tweaks to income tax slabs, GST rate cuts may boost demand

 

By Priyasmita Dutta and Krity Ambey

 

NEW DELHI – In the current economic scenario, where there are concerns about the government's capital spending avenues reaching limits, economist N.R. Bhanumurthy said it is time to revert to the Fiscal Responsibility and Budget Management Act and to keep capital expenditure at 3% of GDP going forward. "... in 2024-25 (Apr-Mar) it is somewhere around 3.3%. Now we should look at the 3% target so that 0.3% funds will be available for the private investors," Bhanumurthy, director of Madras School of Economics, said. 

 

The government pressed the pedal on capital expenditure in the post-COVID-19 era to revive growth and crowd-in private investments. However, there has been a slowdown in public spending in the current financial year. The government's capital expenditure in FY24 fell short of target by over INR 500 billion, and it is also expected to fall short in FY25 by INR 1-1.5 trillion, from the budgeted estimate of INR 11.11 trillion. 

 

Limiting capital expenditure to the tune of 3% of GDP will have multiple benefits, Bhanumurthy argued. By ringing down the government's capital spending, and consequently its borrowing, interest costs in the form of the yields on government bonds will fall, the economist said. Moreover, it will free up banks' investment appetites to lend to the private sector, or invest in debt instruments issued by private companies. "It will provide more resources for the private capex (capital expenditure) recovery," he said. 

 

"There is a shortage of liquidity because there is a capital flight happening, particularly short-term capital is actually going out, so that is putting huge pressure on the liquidity in the money market," the economist said. 

 

On the other hand, lowering the government's market borrowing, coupled with revenue buoyancy which will help lower the revenue deficit, will bring down the overall fiscal deficit, he said. "Bringing down the capex to 3% and bringing the revenue deficit below 1%, the overall fiscal deficit will be less than 4%. That helps resource availability for the private sector through reduction in interest rates and also through liquidity channels," he said. 

 

Besides the capital crunch, Bhanumurthy also said that private investors are facing risks from the external environment, which is preventing them from expanding in a big way. "For some of the new economic sectors, like electric vehicles or semiconductors, they are all really waiting for how the global economy is going to be, navigated under the new US presidency," he said. "So there is a real risk that seems to be holding private investments, particularly the foreign private investments."

 

GROWTH PANGS

The sluggish public expenditure this fiscal has also led to slower economic growth, with GDP growth slowing to a seven-quarter low of 5.4% in Jul-Sept. The National Statistical Office in the statistics ministry's first advance estimate has projected GDP growth in FY25 to slow down to a four-year low of 6.4%.

 

Bhanumurthy is optimistic about an upward revision in economic growth in the statistics ministry's next estimate for the year. "I believe that final growth numbers would be better post Q2 (Jul-Sept), as we are also seeing some kind of recovery in the exports, and added to that, we are expecting much better numbers in the agriculture sector," Bhanumurthy said. India's merchandise exports grew 9.5% in the December quarter from $102.87 in Jul-Sept.

 

There are some concerns about urban consumption, Bhanumurthy said. "In fact, I have an opinion that maybe the tax collections are actually eating away urban consumption capacity. Meaning, taxes are having a negative multiplier impact." The economist suggested tweaks to the income tax slabs as well as Goods and Services Tax rates to boost consumption.

 

On the direct tax side, the government should consider raising the minimum income tax slab above the current threshold of INR 700,000, so that people may have more disposable income, Bhanumurthy said. "One strong suggestion I've been making in the recent period is that instead of focusing only on the expenditure side, the policy intervention could also be on the taxes side."

 

The GST Council can also look to lower GST rates on certain commodities to address demand, Bhanumurthy said. "And as and when the economy picks up, one can always revert to the original levels (of GST rate)."

 

The economist also suggested that there is a case for the Centre to consider cash transfer schemes for women to address the nutrition deficiency in India. In 2024, governments in several election-bound states announced cash hand-out schemes for women, like Maharashtra's 'Majhi Ladki Bahin Yojana' and Jharkhand's 'Maiya Samman Yojana'. Under the schemes, the state governments provide financial assistance to eligible women through monthly transfers of INR 1,000-INR 1,500 to their bank accounts. 

 

While the schemes may be seen as part of the state governments' populist strategy, these may have a huge positive impact, Bhanumurthy said. "Several pilot studies on this have found that little more money in the hands of women will actually lead to better nutrition and better health outcomes for women and the girl child." 

 

"India is doing very well in many indicators, but there is a cause for concern when it comes to nutrition. Cash transfer schemes focused on women could address this long-standing issue." 

 

India's rank has been over 100 for the last five years on the Global Hunger Index. In 2024, the country ranked 105 out of 127 countries in the index.   End

 

Edited by Tanima Banerjee

 

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