Published in Livemint - News
1 month ago
Ahead of Budget 2020, a common demand from economists and analysts was for greater spending to reignite the economy. In the end, that stimulus never came -- largely because of a lack of resources. India’s deteriorating fiscal position made any large injection into the economy difficult. But how bad is India’s fiscal situation? One measure of this comes by comparing India to its peers: 9 other emerging economies (EMs).
Taken together, these 10 emerging economies, which are tracked in Mint’s monthly Emerging Markets tracker, are now a major engine in global economic growth. Collectively, the share of these 10 EMs in the global economy has doubled in the last two decades, with China, India and Brazil contributing 75% of this growth.
In all these EMs and the rest of the world, the primary measure of fiscal performance is the fiscal deficit. According to 2019 estimates from the International Monetary Fund (IMF), India’s fiscal deficit (standing at 7.5% of GDP) is the joint-highest among the cohort (along with Brazil) and significantly higher than the EM average (3% of GDP). Unlike the Budget 2020 fiscal deficit estimate (3.8% in 2019-20), which captures fiscal deficit of the union government, the IMF’s fiscal deficit definition includes the financial position of all levels of government within a country (centre, state and local governments). Of the 10 EMs, only half (China, Russia, Indonesia, Philippines, and Thailand) has enjoyed brief spells of fiscal surplus over the last two decades.
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A big reason for India’s precarious fiscal position has been its struggles with tax collection. The tax-GDP ratio for centre and states combined was 17.1% for India in 2018-19, lower than the EM average (20.9%) is behind the bigger economies such as China, Brazil and Russia. More crucially, India’s tax revenue growth has plateaued in recent years. And even after a corporate tax cut last year, India’s tax targets remained unmet by over 1% of GDP, according to one estimate.
One major constraint for India has been its narrow tax base. Since an overwhelming majority of Indians do not pay taxes, Indian tax revenues remain largely dependent on indirect tax collections, which include all taxes on spending (such as GST). These indirect taxes account for over two-thirds of total tax revenue in India, the largest such proportion among the 10 EMs. But even India’s indirect tax collection has suffered recently because of persistent issues with the implementation of GST
Zooming into spending, at 27.1% of GDP in 2019, India’s total government spending, which includes central and state governments’ expenditure, is close to the average of all EMs (27.7%). Over half of the government’s expenditure in India goes towards subsidies and other programmes but even this ratio is far behind Russia and Brazil. India also spends a substantial amount on interest payments. At 2017 levels of expenditure (the latest data available for cross-country comparisons), 6% of total government spending went towards interest payments, a proportion only behind Brazil.
Higher proportion of interest payments are a direct outcome of the debt levels accumulated by the Indian government. India’s debt-to-GDP ratio at 69% of GDP is the second-highest in among the EM economies, again trailing only slightly behind Brazil. Most of this debt has been domestically sourced. India’s external debt levels (20% of GDP) is the second-lowest among the EMs.
Across EMs, the cost of borrowing, or the risk-free rate at which governments borrow, has come down compared to a year-ago period. India’s cost of borrowing, though, remains higher than its peers (6.5% in the month of December 2019), posing a further challenge for any greater spending.
Taken together, comparing India’s performance on different fiscal parameters with the other EMs’ average performance, India’s fiscal deficit and debt is significantly more burdensome. This is a direct result of India’s inability to raise revenues (which is lower than EM average) to meet spending (which is largely in line with the EM average).
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This, though, has been a consistent pattern: India’s fiscal deficit has been consistently higher than the most other EMs over the last decade. But this fiscal excess seems to have had little discernible effect on economic growth: India’s growth rate, too, has been consistently higher than most other EMs over the last decade. The relationship between fiscal deficit and growth is among the most contentious issues in economics but in budget 2020, the Indian government chose to lean towards austerity. As growth dries up across the EMs and in India, only time will tell if this was the right choice.