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India needs structural reforms to realise high growth potential

The Government of India’s plans to finance its high expenditure and debt levels will need structural reforms to come back to the high economic growth trajectory.

The Government of India has plans to keep spending to boost economic growth, the total expenditure is expected to be over Rs 34.83 lakh crores which includes the capital expenditure of Rs 5.54 lakh crore, similar to the bloated figure of 2021 expenditure. The Centre has to pay Rs 8.09 lakh crore as the interest payment for FY 2021-22 which amounts to 23 percent of the government’s expenditure up from 20 percent recorded for FY 2020-21.

This begs the question as to how the government will finance its high expenditure and debt levels. The government is betting on the buoyancy in tax revenues to manage interest payments. The latest moves to tax the Employee Provident Fund’s interest payments above Rs 2.5 lakh annually is one such method. The Economic Survey 2020-21, argues Debt sustainability is possible in the Indian context if the economic growth remains higher than the interest rate paid on the debt. “Given India’s growth potential, debt sustainability is unlikely to be a problem even in the worst scenarios,” said the Economic survey 2020-21.

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On the other hand, the government is expecting a surge in tax revenues with the economy expected to grow above 10 percent as per the Reserve Bank of India forecast. The government further wants to ease its interest payment weigh by divestments. Finance Minister Nirmala Sitharaman, in her Budget 2021-22 speech, announced that the government has approved a policy of strategic disinvestment of public sector enterprises that will provide a clear roadmap for disinvestment in all non-strategic and strategic sectors.

The government in the FY 2021-22, plans to complete the disinvestment of BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam Limited and others. Through this it plans to raise Rs. 1,75,000 crore as receipts from disinvestment in BE 2020-21.

The Indian economy needs structural reforms to return to a high growth path.

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