The collapse in global commodity prices partic-ularly oil has
further reinforced macroeco-nomic stability in India and cemented
Indias sta-tus as the model child within the emerging
marketuniverse. But, despite this, growth and private invest-ment
remain in a funk, afflicted by overly-leveraged pri-vate
infrastructure firms, and by risk-averse public sec-tor banks that
are weighed down by elevatednon-performing assets and who awaita
significant recapitalization from thegovernment the fiscal space
forwhich is not apparent.
It is against this backdrop that mar-kets are eagerly awaiting
the Budget,hoping that it can simultaneouslyjumpstart growth while
reinforcingmacro-economic stability. Doing sowill not be easy,
however. In fact, pri-ma facie, the Budget faces three poten-tially
conflicting objectives animpossible trinity, so to speak.
First, as the governments mid-year economicanalysis correctly
identified, public investment needsto step up to the plate.
Non-defense capex spending ofthe central government budget averaged
two per centof GDP between 1992 and 2008, but has fallen to just
oneper cent of GDP the last five years. Given the woesafflicting
private investment, more public investmenton infrastructure is
sorely needed to boost productiv-ity and gradually crowd-in private
investment.Questions about state capacity will inevitable
arise:does the state have the implementation capacity toidentify,
contract out and monitor a slew of publicworks projects? But thats
where this government willneed to show its mettle.
But, more fundamentally, where will the fiscal spacefor this
come from? It is tempting to believe that, in a bid
to boost public investment, the medium-term fiscalpath for the
central government deficit 3.6 per cent ofGDP in FY16 and three per
cent in FY17 should be tem-porarily abandoned. But that would be a
dangerousapproach given the level of Indias deficit and debt.Indias
consolidated fiscal deficit is currently close to 6.5per cent of
GDP, while countries with the same sover-eign rating as us have a
median and mean deficit of 2.5
per cent of GDP 400 bps lower! Theinflation tax has been
chipping awayat Indias debt/GDP ratio, but at 65per cent it is
substantially higherthan the 40 per cent debt/GDP ratio ofthe
median country amongst our sov-ereign ratings peers. Deviating
fromthe laid out path of fiscal consolida-tion could raise
questions about fiscalcredibility and make ratings agenciesand
foreign investors nervous in ayear when the Fed is poised to
raiserates and the appetite for emerging
market assets may diminish. What if growth is weakagain next
year? Will authorities again abandon a newfiscal road-map? This is
a slippery slope and in therules versus discretion debate, the
former has clear-ly won out in India over the last decade.
But, as if all this is not enough, the third simulta-neous
challenge, is to ensure that even as the fiscalis consolidating it
is not generating a negative fis-cal impulse on the economy, and
thereby makingfiscal policy pro-cyclical (i.e. tightening the fisc
whengrowth is weak and below potential) a point againvery well
articulated by the mid-year economic analy-sis of the
government.
So how does the Budget get around this impossi-ble trinity:
higher public investment, yet continuedfiscal consolidation and an
underlying fiscal stance
that is not procyclical?There is a solution! An asset swap on
the public-
sector balance sheet, that raises more revenue fromasset sales
and ploughs those proceeds into infra-structure assets.
The government has a slew of assets on its balancesheet. No one
is arguing for privatising all these assets.But if the government
were to gradually reduce itsstake across various public sector
enterprises, whilemaintaining a 51 per cent stake, sell its assets
withinSUTTI which serve no strategic purpose continueto sell
spectrum, and think creatively by selling/leasingthe large quantum
of its land holdings, for example, itcould mop up a very large
quantum of revenue over thenext two to three years. At last count,
the value of theseassets, even while maintaining a majority stake
for thegovernment, was easily above five per cent of GDP.
So what the government needs is a predictable plan say of 0.8-1
per cent of GDP for the next 2-3 years ofasset sales that are
directly ploughed into publicinvestment such as highways, roads,
bridges, ports,airports to offset the private sectors inability
tofinance this infrastructure. This allows authorities toraise more
funds for public investment without bust-ing the fisc.
To be sure, this is not a case of selling the family sil-ver.
Instead, viewed more holistically from the public-sector balance
sheet, this is simply an asset-swap, fromcurrent holdings in PSUs
into, arguably, more produc-tive assets that will boost
productivity and growth.
This also has benefits from a flow perspective. Ifincremental
fiscal consolidation is achieved largelythough incremental asset
sales, there is no negative fis-cal impulse on the real economy. In
most countries ofthe world, asset sales are below-the-line
financingitems and do not count towards the deficit, becausethey
are not contractionary, like taxes or duties, and aresimply an
exchange of assets between the public andprivate sector. So if next
years fiscal consolidationfrom 4.1 per cent to 3.6 per cent of GDP
is achieved byincreasing asset sales by 0.5 per cent of GDP over
thisyears outturn, the fiscal will not be imparting a nega-tive
impulse on the economy, unlike if the consolida-tion was achieved
through higher taxes/duties or low-er expenditures. In other words,
the underlying fiscalstance would not really be contractionary,
even as theheadline deficit is reduced to re-assure investors
andratings agencies that the fiscal goal-posts are not beingchanged
in the middle of the game.
So an asset swap on the public sector balance sheetwill allow
the government to have its cake and eat it too:boost public
investment, stay on the fiscal consolida-tion path it had agreed to
in the July Budget, and yet notimpart a negative fiscal impulse to
an economy whengrowth is weak.
Of course, the Budget must also do whats less con-troversial: to
compensate for the loss of inflation tax,excise and import duties
on oil products must rise, sothat these funds can be ear-marked for
more infra-structure investment, rather than being passed on
tohouseholds to be consumed. Given the oil-subsidiesthat existed,
households never really experienced oil at$120. Why, then, should
they get the full benefit whenoil is at $50? And the government
must better target foodand urea subsidies to derive savings on
those fronts.
But the key for the Budget is to jumpstart publicinvestment
while staying on a path of fiscal consoli-dation. A judicious use
of its balance sheet will allow thegovernment to do both. It must
now seize the moment.
The writer is chief India economist, JPMorgan
Is the Budget facing animpossible trinity?An asset swap can
simultaneously boost public investment, reducethe fiscal deficit
and keep fiscal policy from being pro-cyclical
ILLU
STRA
TION
BY
BIN
AY S
INH
A
SAJJID Z CHINOY
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