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Should Mr Modi continue to give stimulus to India's 'recovering' economy?

February 11, 2016 12:06 IST

If the real economy is indeed looking up, then it no longer needs hand-holding and fiscal laxity

The recent release of advance estimates of national income for the current financial year by the Central Statistics Organisation or CSO has highlighted a certain contradiction at the heart of the government's policy focus.

In the run-up to the Union Budget, to be presented just a few weeks from now, this contradiction will have to be resolved one way or the other. The essential question is this: Is there a manufacturing revival? Or does the depressed state of the productive economy warrant a stimulus and a pause on fiscal consolidation?

On the one hand, the government's own figures suggest a rosy picture. Overall, the gross domestic product (GDP) of the economy is supposed to grow at 7.6 per cent, but that is with agriculture growing at only 1.1 per cent in terms of gross value added (GVA). This means that growth in the rest of the economy is supposedly over nine per cent, in a year with a deficient monsoon.

Manufacturing is supposed to grow at 9.5 per cent in 2015-16, compared to 5.5 per cent in the previous year. The figures are even higher for the third quarter of 2015-16, the three-month period from October to December of 2015.

In that period, manufacturing grew at 12.6 per cent according to the CSO. This is in spite of the fact that during this very period at least one manufacturing hub, the area around Chennai, suffered devastating floods. The government has backed these figures with supporting data. Senior representatives of the government have defended the professionalism of the CSO and said they are using globally benchmarked methods.

The growth in tax collections, particularly in indirect taxes, is being cited as further evidence of a recovery in economic activity. Certainly, the government can make a persuasive case if it wishes to, using generally available data, that the real economy is on the mend - and manufacturing in particular.

Read our full coverage on Union Budget 2016

But, if this is the case, then why is there the need for further stimulus of demand, including through fiscal loosening to finance infrastructure spending? Here lies the problematic contradiction at the heart of the Budget-making process. If the real economy, including manufacturing, is indeed looking up as the government says it is, then it no longer needs hand-holding and fiscal laxity.

Instead, the focus should be on widening the tax net, ensuring compliance through closing loopholes, on reducing and rationalising subsidies, and on controlling wasteful spending - all the paraphernalia of fiscal responsibility associated with an economy in which non-farm output is expanding at over nine per cent.

It should also resist the temptation to respond to pleas from the corporate sector for handouts, for tax breaks, for tariff protection and so on - none of which surely is relevant if the manufacturing sector is growing at over nine per cent.

If, on the other hand, the government wishes to expand fiscally, whether on infrastructure or through more lax tax measures, then it must acknowledge that all is not as rosy as the official figures suggest. It cannot, logically and practically, have it both ways.

Read our full coverage on Union Budget 2016

Business Standard
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