A long winter for the Indian economy

#GS3 #ECONOMY

Public sector investments are likely to remain depressed as states cut back on spending, making recovery difficult.

  • 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.
  • 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 percent decline in capital expenditure, with revenue expenditure mildly up 1 per cent.
  • 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.
  • 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 utilization remains low, at an average 58.6 per cent so far this year, way below the 71.9 per cent seen last year.
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