With Central Statistical Organisation predicting that India may grow at just 5% in this financial year, finance minister is likely to look at ways that can revive the capex cycle. That's because it is the lack of investment in the infrastructure space due to administrative bottlenecks that has impacted growth. Thus, there is a strong possibility that the government may take some innovative measures in the upcoming budget to promote infrastructure investments. Because unless that is done, both capex cycle and growth would continue suffer.
One option that is being proposed by some economists to kick start the investment cycle is to curb the outflow of dividends doled out by corporates by taxing them if they exceed a certain threshold. This will prompt corporates to invest more in their business rather than paying out high dividends which may attract a tax. Whether or not this suggestion is implemented still remains to be seen.
However, one thing is for sure, if the government wants to restore growth it will have to look out for some innovative ways as it has very limited headroom to revive growth via expansionary fiscal policies. Growth can be promoted by either increasing expenditure or reducing taxes. However, government cannot afford either of these since it will increase the fiscal deficit and threaten India's sovereign rating.
Another way to boost growth is to reduce the interest rates. But considering that inflation continues to remain high even that option is ruled out. And in order to contain inflation government will have to take steps to reduce twin deficits. That's because fiscal deficit is financed by borrowings. As a result, new money stock is created in the economy which stokes inflation. Also, rising current account deficit would mean that the nation's currency would weaken. This gives rise to inflation as foreign goods become more expensive. Thus, using interest rate, as a measure, to bolster corporate investments can fructify only if the deficit issues are addressed.
Thus, it appears that the government has very little headroom to kick start the capex cycle by traditional ways of lowering interest rates or expanding the fiscal gap. It will have to look out for some innovative ways to restore spend in the infrastructure space. If not, re-scaling 8-9% growth may well turn out to be a distant dream.