Arun Jaitley comes out all guns blazing

The economic growth push that the government is looking at through massive public spending on infrastructure and its bank recapitalisation plan has the potential to reap huge economic dividends but would depend on how they were executed, economists told DNA Money.

Finance minister Arun Jaitley and his team, on Tuesday, announced a mega road construction programme of 83,000-km highways with an investment of around Rs 7 lakh crore over the next five years and Rs 2.11-lakh-crore bank recapitalisation through the issuance of recap bonds and budgetary and market support.

D K Srivastava, chief policy advisor, EY India, said that if the government’s expenditure on roads were “frontloaded” then it will be “beneficial” for jobs and output but could “dent” the fiscal deficit target of 3.2% of the GDP for the current fiscal.

“The critical consideration is over what period the money on mega road building programme would be spent. If it is frontloaded with immediate expenditure in the construction sector, it would definitely have a beneficial effect both on employment and output. However, the financing of this might dent the fiscal deficit target for this year if the expenditure is front-loaded and a good amount is financed this year,” he said.

The EY economist also lauded the bank recapitalisation structure that is likely to keep a chunk of the borrowing “off-budget”; “it is a welcome move but the bulk of the borrowing is likely to be off-budget as budgetary support is limited”.

According to him, if these moves help in lifting the gross domestic product (GDP) growth then the current debt-to-GDP ratio would be unaffected.

“On the whole, these would be beneficial for the economy but there would be an implication for the fiscal deficit, partly on-budget and partly off-budget. The government debt is not likely to be affected if growth is pushed up,” said Srivastava.

Ranen Banerjee, partner and leader public finance and economics, PwC India, said if the recap bonds were taken as on-budget event then there could be some slippage in the debt-to-GDP ratio.

“While the government has clarified that the infra spending for this year has already been factored in the fiscal deficit, there was ambiguity on the modality of the bank recap bonds. In the event these are not taken as an off-budget borrowing and is taken on-budget, then there would be a negative impact on the debt-to-GDP ratio as reported,” Banerjee told DNA Money.

Jaitley told the media while unveiling his plans to revive economic growth that infrastructure investment had already been factored in the fiscal deficit. Last few quarters have seen GDP growth slip due to major structural reforms such as demonetisation and goods and services tax (GST) taken by the government. The first quarter of the current fiscal saw the national income dip below 6%.

“As far as the infrastructure investment is concerned we have factored it in the fiscal deficit. We have already made it clear in the last 3-4 years that the glide path of the fiscal deficit will continue to be maintained. Now what happens to the bond is a separate question which will depend on the nature of bonds itself that we will be clarifying in the due course once the bonds are issued,” he said.

The minister  assured that since it will make banking system stronger it would help  the economy at large; “in any case the if the bonds are intended to be  issued for the purpose of strengthening the banking system itself it  will go in the larger interest of the economy”.

Arvind  Subramanian, chief economic advisor (CEA) to the government, said a  recapitalisation bond was usually taken as debt but it would depend on  who issued it.

“The recapitalisation bond comes towards debt.  It will depend on which agency issues it – the government or someone  else. Under IMF (International Monetary Fund), such recapitalisation is  treated below-the-line, which means it is not part of the deficit. But  under our own accounting practices, it is above-the-line and part of  deficit. The reason it is below-the-line is that when it is  recapitalised it does not add to demand for goods and services which is  the deficit measures,” the CEA said. He said if its  effect on borrowing cost of capital helps in boosting confidence then it  will “actually improve investment”.

PwC’s Banerjee believes  future public spending commitment could spur the currently lacklustre  private investment; “the future spending commitments post FY 18 could  also spur some private sector investments anticipating demand uptick”.

He  also feels that since investments were targeted at infrastructure  construction, which was labour intensive, it would generate jobs and  consequently demand.

According to him, if the bonds are issued  as long-term bonds then its servicing could be deferred to when the  government finances are in a better state.

“In the event, it  (recap bond) is floated by the government directly and the borrowing is  on the budget, there will not be an immediate impact on finances as the  servicing of these bonds will be needed at maturity. If these are issues  as long-term bonds, then the servicing requirements will be deferred  with no immediate implication on annual government finances. However,  these would add to the debt stock and consequently be reflected in the  state of government finances as a downward risk,” he said.

Banerjee  said the recap bond route allowed for a deferred liability on the  government; “given the expected rebound in the economy over the next  financial year, higher revenues owing to more formalisation of the  economy.”