It’s no secret that the country is in the midst of an economic slowdown. Every macro economic indicator is pointing in that direction. GDP growth is at a 5 year low, investment is at a 15 year low, unemployment is at a 45 year high and consumer demand is languishing big time. Just take a look at the automobile sector. Passenger vehicle sales in India posted its steepest drop in nearly 18 years this May. What is going on?
And, to top it all off, the recent budget announced on 5th July, which was suppose to take some drastic steps to boost investment and demand, failed to do so. In fact, by ushering in laws that were seen to be detrimental to stock market participants, such as enhancing the maximum marginal rate of tax to 42.74% and raising the minimum public shareholding in listed companies from 25% to 35%; it managed to scare off foreign portfolio investors, and now the market in a free fall. In a just shade above two months since the Modi government has come to power, the stock markets have lost in excess of ₹ 10 trillion in market cap.
Meanwhile, what is the government doing?
If one recalls, a little more than a month ago, former Chief Economic Advisor to the Modi government, Arvind Subramanian, who served between years 2014 and 2018, wrote a research paper which was published at Harvard University. It stated that India’s GDP growth rate had been overestimated by a whole 2.5%. Mr Subramanian claimed that rather than growing 7% a year during that period, the growth rate was actually a mere 4.5%.
Recently, another important macro economic indicator, the fiscal deficit figure, has come under suspect. The fiscal deficit is the difference between the receipts of the government and its expenditure. The difference is made up by government borrowings. A lower figure is always desirable, as it shows the government has been able to maintain fiscal discipline and not spend beyond its means. The budget, which was presented on 5th July reported a fiscal deficit figure of 3.46% of GDP for the financial year 2017-18. However, the Comptroller Auditor General (CAG), which is an authority set up to audit the receipts and expenditures of the government, has come out with a different set of findings. The government auditor, in a presentation just three days after the budget, on July 8th made public its findings which suggested that the central government’s fiscal deficit figures may be considerably higher than those stated in the union budget and pegged it at 5.85% of GDP, instead of the 3.46% as declared.
In a nutshell what the CAG said was that the government used public sector enterprises to fund capital and revenue expenditures and did not include those figures in its fiscal deficit calculations, thereby presenting a much lower figure than what it actually was.