Reversing the slide

On economy, near-term focus should be on capital expenditure, and steps to boost demand in sectors with a multiplier effect

That the Narendra Modi government, which returned to office with a resounding mandate, should hit the ground running was much needed, given the state of the economy. But that among its first steps should be to sign off on the proposal to expand the PM Kisan Yojana to cover 2 crore more farmers and a pension scheme to cover 3 crore retail traders and shopkeepers, is more debatable. The extra expenditure may be justified, though, by a government struggling to meet budgeted revenue targets — as a way of addressing political constituencies which supported the BJP, and also as a directional shift towards income support and building of a social safety net in a limited manner. It is also consistent with the party’s commitment to follow up on these in its poll manifesto. The question is whether these government interventions can be effective or will at best provide a temporary boost at a time when the fourth quarter GDP numbers are at a five-year low and when growth for the last fiscal at under 7 per cent is below most expectations. Some economists argue that the economy may well now be at the bottom of the cycle and is on course for a gradual reversal this fiscal.

The challenge, especially when the economy is firing on one engine, and when expectations are riding high, is to ease the fiscal tap and to attempt the so-called big bang reforms. The fact is, however, that such reforms can wait for now. Rather, the near-term focus should be on capital expenditure and steps to boost demand in sectors such as housing, steel and cement, which have a multiplier effect. It should help that interest rates appear to be headed southwards.

Logically, average GST revenues should be higher, with an expansion of the base, more simplification and stricter compliance. Banks also should be on course to lend more provided the government doesn’t delay stumping up capital and carrying out governance changes this time around. In the first budget after the Modi government took over in 2014-15, Arun Jaitley, who was then finance minister, said that the country was in no mood to suffer unemployment. Five years on, that still resonates.

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