Over the past few weeks, a few leading economists have argued that, given the very low growth impulse in the economy, the government would do well to ease up a bit on the fiscal deficit. If the economy grows, the argument goes, the fiscal deficit will get fixed on its own. Seductive as the argument is, it is misleading. It is obviously true that any increase in government expenditure helps GDP in the sense of an immediate stimulus, but it also creates inflationary problems. In any case, India’s problem is not as much the collapse in government investments as it is the collapse in government savings coupled with the crash in private corporate investments. Which is why the Budget is going to be looked at in terms of what it does to unleash animal spirits, not whether there is a small increase in capital expenditure—this is where the hike in FDI limits for insurance, defence and e-commerce comes in, where the removal of the retrospective taxation policies and others come in.
A look at the national accounts data is instructive in this context. Between FY08 when India’s savings were at their highest levels of 36.8% of GDP—at 38% of GDP, investments were also at their highest—and now, the sharpest fall has been that in public sector savings, from 5% of GDP in FY08 to 1.2% in FY13. And within this, it is government savings—the numbers we see in the Budget—that have collapsed the most, from 0.5% of GDP in FY08 to minus 1.9% in FY13. During the same period, while overall investment levels fell from 38% of GDP to 35%, household investments rose from 10.8% of GDP to 14.8% while public sector investments fell from 8.9% to 8.1%, but the real collapse was in private corporate investments which fell from 17.3% of GDP to a mere 9.2%—unless this is revived, there is little point trying to push PSUs to make more investments or raise government capital spending through higher deficits.
In any case, it is also incorrect to assume that capital spending by the government automatically results in an increase in capital formation which is what the economy really needs. In FY13, for instance, the Budget planned a capital expenditure of R2,04,816 crore—when the overall Budget expenditure got compressed by R80,000 crore, this got reduced to R1,66,858 crore—this was not the actual increase in government capital formation. The economic and functional classification