How can we improve the fiscal situation in India?

India Jan 19, 2021

The budget can be an opportunity to lift the economy and to increase the consumption which has been impacted by the pandemic and has shown no signs of recovery and still continues to show the decline trends.

Continue decline in the economy

The initial estimates of GDP for Fiscal Year 2020-21 are much better than the earlier market predictions but the demand side of the market however still continues to decline with private consumption falling by 9.5%. Per capita private consumption is also on a fall and has been significantly contracted by 10.4% while capital formation has contracted by 14.5% with imports and exports also contracting at a faster rate.

What should be growth in Nominal GDP for Fiscal Year 2021-22?

In terms of number the average growth in Nominal GDP for the decade in 2013-14 was 15%, but since then average GDP deflator has fallen to 7.6% far outpaced at average real GDP of 6.8%. For the six year period ending in 2019-20 the average nominal GDP growth was at 10.4% with the real GDP growth growing far back at 6.8% far outpacing the GDP deflator of 3.6%. It is extremely important that we ensure that the current inflation curve is kept under control through many policy interventions.

Policy recommendations for farmers

  1. Change conditions for renewal of loan on Kisan Credit card

Out of the outstanding bank credit of 12 lakh crore to the agriculture and allied sector 7 lakh crore is kept aside for Kisan Credit card. The KCC protocols of banks have been under stress over the years due to various factors like crop losses, debt waivers and the rigidity of KCC products. It is proposed that for renewal of KCC loan of small and marginal farmers and for loan of other categories of farmers for amounts upto 3 lakhs, the payment of interest must be a sufficient condition for renewal as with other loans the above measures has the potential to reduce the credit cost for banks considerably on KCC.

  1. Formalise tenancy and provide credit to tenant farmers

There are in all 11.5 crore farmers who are a part of PM-KISAN beneficiaries out of which only 6.5 crore farmers have KCC the remaining 4-5 crore could eb land owning farmers and at least 3-4 crore of such could be tenants or landless farmers. As of no such tenants farmers are not formalised into the credit deliveries of scheduled commercial banks. As of now it requires state interventions for tenancy certificates which is only available in the state of Andra Pradesh. The formation of SHG model under the Deen Dayal Antodoya Yojana will formalise tenancy even without formal documentation of tenancy. This will help more than 3 crore farmers to take benefit from the PM-KISAN beneficiaries.

Increase investment in Health and Education

For health the government could introduce medical savings accounts, a scheme that will deduct interest from savings accounts and pay towards Mediclaim policy. For the record the size of a health insurance is 32,000 crore and the savings bank interest is 1.15 lakh crore. The government should also consider exempting all retail and health insurance products from GST.

Three suggestions on Fiscal situation

First withdraw all tax appeals. Second, accept all domestic arbitration decisions against government departments and agencies. Third, clear all outstanding dues to all parastatal agencies within a given time.

This will be a milestone structural administrative change that could even become a one-time balance sheet entry that recognises all the liabilities and pays them off. As a consequence India will jump multiple positions on the Ease of Doing Business rankings.

By implementing these steps the government could use this opportunity to stimulate the economy and aid the economic recovery.

This, article has been written by Siddhesh Patil for The Paradigm

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