Explained Ideas: Why it may be a long winter for the Indian economy

Public sector investments are likely to remain depressed as states cut back on spending, making recovery difficult, write Dharmakirti Joshi and Adhish Verma.

In their joint opinion piece, Crisil economists Dharmakirti Joshi and Adhish Verma write that “the pandemic has delivered a ‘scissor cut’ to the government’s finances”. On the one hand, economic output, and therefore government revenues, are shrinking, while on the other, the government has to spend more to safeguard lives and livelihoods.

“The effect of this goes far beyond a widening of the deficit. It has far-reaching consequences for both the Centre’s and states’ ability to invest and lift the economy out of the current phase,” they state.

It also means more borrowings. And as states have a good part of their revenue stream coming from the Centre, it changes their debt servicing ability for the worse.

Presently, fiscal data for the first half of the year (April-September) is available only for 11 large or so-called non-special category states. “As per our analysis, these states’ own revenue is down 21.5 per cent year-on-year as compared to the previous five years’ average growth of 10.4 per cent,” they state.

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What has been the impact of such a large fall in revenue collections?

Most directly, the Centre’s total expenditure has declined by 0.6 per cent year-on-year during the first half of the current financial year. This is led by an 11.6 per cent decline in capital expenditure, with revenue expenditure mildly up 1 per cent. For the 11 states, total expenditure and capital spending have contracted by 1.5 per cent and 23.4 per cent respectively, while revenue expenditures have grown by 1.5 per cent. ? Express Explained is now on Telegram

“The bottom line is that with the slowdown in growth, and as a consequence in government’s revenues (for both, the Centre and states), debt servicing for states, which looked comfortable, is set to become burdensome,” they write.

Combined with rising debt levels, this means that states are unlikely to push up their capital expenditure. Consequently, overall investments could take a substantial hit this fiscal year with the government’s and the private sector’s ability and willingness to invest impaired, despite the fall in interest rates (adjusting for inflation, real rates are even lower). The private sector will remain wary of investing as demand uncertainty continues, and capacity utilisation remains low, at an average 58.6 per cent so far this year, way below the 71.9 per cent seen last year.

“Hence, it might be a while before the cylinder of public investment starts firing,” they conclude.

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