Can higher fis­cal deficit re­vive in­vest­ment de­mand?

The Pak Banker - - OPINION - Pinaki Chakraborty

AD­VANCE es­ti­mates of na­tional in­come for 2015-16 were re­leased by the Cen­tral Sta­tis­tics Of­fice (CSO) on 8 Fe­bru­ary. The press note from CSO shows to­tal gross fixed cap­i­tal for­ma­tion (GFCF) is ex­pected to be Rs.39.82 tril­lion, com­pared withRs.38.44 tril­lion for the year 2014-15. In 2011-12, GFCF as a per­cent­age of gross do­mes­tic prod­uct (GDP) was 33.6%. It is es­ti­mated to be around 30% of GDP in 2015-16. Ahead of Bud­get 2016-17, lack of in­vest­ment de­mand is a ma­jor macroe­co­nomic con­cern. Dur­ing the last five years, the share of cap­i­tal for­ma­tion in man­u­fac­tur­ing re­mained con­stant at around 18%. The share of in­vest­ments in other key sec­tors, namely, con­struc­tion, trans­port and stor­age and com­mu­ni­ca­tion ser­vices, have also de­clined. De­cline in in­vest­ment in th­ese crit­i­cal sec­tors only in­di­cates that all is not well with the econ­omy.

Within GFCF, the only sec­tor where there has been a sud­den in­crease in the share of in­vest­ment is 'trade, ho­tels and restau­rants', which might be a re­flec­tion of credit-led growth in con­sump­tion de­mand. What should be done to re­vive in­vest­ment de­mand for crit­i­cal sec­tors of the econ­omy? The most talked­about pol­icy stim­u­lus seems to be re­lax­ation of the fis­cal deficit tar­get for the year 2016-17 to in­crease pub­lic cap­i­tal spend­ing to crowd in pri­vate in­vest­ment. This is the eas­i­est thing to do for any govern­ment and can be done pro­vided pub­lic cap­i­tal spend­ing leads to an au­to­matic in­crease in pri­vate in­vest­ment de­mand. How­ever, the link be­tween the two is cer­tainly not au­to­matic. Also, the struc­tural weak­ness in cen­tral govern­ment fi­nances is the pres­ence of a large rev­enue deficit. As per the medium-term fis­cal plan, the rev­enue and fis­cal deficits of the cen­tral govern­ment for the year 2016-17 are ex­pected to be 2.4% and 3.5% of GDP. When more than 70% of the bor­rowed re­sources are to be used by the cen­tral govern­ment for fi­nanc­ing cur­rent con­sump­tion ex­pen­di­ture in the year 2016-17, its down­side fis­cal risk can­not be ig­nored. Also, there is no guar­an­tee that in­crease in fis­cal deficit will re­sult in an au­to­matic in­crease in pub­lic cap­i­tal in­vest­ment in the pres­ence of large rev­enue deficit.

It is true that pres­sure on rev­enue deficit might have eased due to low crude prices and con­se­quent re­duc­tion in the sub­sidy bill on pe­tro­leum prod­ucts. Also, in­di­rect taxes from pe­tro­leum prod­ucts due to the in­crease in ex­cise duty on pe­tro­leum helped mo­bi­lize more rev­enues. This is good news when it comes to man­ag­ing rev­enue deficit. How­ever, one should not un­der­es­ti­mate the fis­cal im­pli­ca­tions of the im­pend­ing award of the Sev­enth Cen­tral Pay Com­mis­sion and One Rank One Pen­sion (OROP) scheme. Th­ese two to­gether would con­trib­ute roughly to an ad­di­tional in­crease in rev­enue ex­pen­di­ture to the tune of around 0.7% of GDP. This would cer­tainly put fur­ther pres­sure on rev­enue deficit un­less this in­crease is ad­justed in Bud­get 2016-17, ei­ther through con­trac­tion in non-salary ex­pen­di­ture or in­crease in rev­enues. When it comes to rev­enue mo­bi­liza­tion, the pos­si­bil­ity of an equiv­a­lent in­crease in rev­enue is un­likely, given the low nom­i­nal GDP growth rate. Con­trac­tion in rev­enue ex­pen­di­ture be­yond a point is not fea­si­ble as a large part of it is com­mit­ted in na­ture. Given th­ese, if im­ple­men­ta­tion of com­mit­ments such as Sev­enth Pay Com­mis­sion and OROP are post­poned, it is only go­ing to pro­vide a short-term il­lu­sion of fis­cal com­fort to cre­ate un­man­age­able fis­cal im­bal­ance for the fu­ture.

If it is in­tro­duced in Bud­get 2016-17, fi­nanc­ing rev­enue deficit would be a ma­jor chal­lenge with­out breach­ing the fis­cal deficit tar­get. Thus, one is un­sure whether the talk of breach­ing the fis­cal deficit tar­get is to meet th­ese con­sump­tion ex­pen­di­ture com­mit­ments or to in­crease the pub­lic cap­i­tal in­vest­ment. Also, dis­cus­sion about higher pub­lic in­vest­ment lead­ing to an in­crease in pri­vate in­vest­ment should ex­am­ine what ac­tu­ally has been the move­ment of pub­lic in­vest­ment in the coun­try. Lat­est Na­tional Ac­counts Sta­tis­tics show that GFCF by the govern­ment sec­tor has ac­tu­ally in­creased in the last few years. As a per­cent­age of GDP, the in­crease is from 3.60% in 2011-12 to 4.12% in 2013-14. As per the re­vised es­ti­mate of 2014-15, it is es­ti­mated to be 4.17% of GDP. In other words, there has been an in­crease of gen­eral govern­ment GFCF to the ex­tent of more than half a per­cent­age point of GDP be­tween 2011-12 and 2014- 15. De­spite the large rev­enue deficit of the cen­tre, this has hap­pened due to pru­dent fis­cal man­age­ment by the states by elim­i­nat­ing rev­enue deficit. If we con­sider long-term cap­i­tal ex­pen­di­ture trends, while the cen­tre's cap­i­tal ex­pen­di­ture to GDP ra­tio started de­clin­ing due to large rev­enue deficit, the same for the states started in­creas­ing.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.