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Photo: PTI
Photo: PTI

A real big-bang budget is one that sets the tone for a decade ahead

The exogenous shock of c affords India an opportunity to lay out the contours of its policy thrust for many years to come

As we head towards Union Budget 2021-22, we have first quarter (Q1) and second quarter (Q2) numbers for 2020-21, not beyond. While a budget has policy content, its core is an annual statement of the Union government’s receipts and expenditure. While expenditure is largely insulated from growth prospects in 2021-22, revenue isn’t, particularly tax revenue. As with every budget, an initial question is of nominal (and real) growth forecasts for the economy. Hence, what do we make of the 23.5% contraction in Q1 of 2020-21 and the better-than-expected 7.5% contraction in Q2? Subject to some sectoral variations, the recovery has been broad-based, and while there are concerns about slices of the labour market, that doesn’t negate the macro recovery. Nor can the entire revival be explained as pent-up demand or inventory build-ups. Consequently, real growth should move into positive territory by Q3 of 2020-21. For the entire year, no projection differs significantly from the Reserve Bank of India’s forecast of a 7.5% contraction. At best, an alternative projection might have something like a 7% real decline. This determines the 2020-21 base, on which one makes assumptions for growth in 2021-22. Since growth numbers are year-on-year, a 7.5% decline in 2020-21 would likely mean real growth of 10%, if not more, in 2021-22. By any metric, India has handled covid-19 well. But the pandemic and related constraints on an economic revival remain. Without those, real growth in 2021-22 would have approached 12%. On that base of 10%, for Budget purposes, one needs to plug in an estimate of inflation.

With inflation inching up, particularly in food items, inflation will be certainly cross 4%. Therefore, just as 10% real growth is probably a conservative expectation, so is nominal growth of 14%. But given the uncertainties, it is best to under-promise on both growth and revenue projections. A government borrowing programme that doesn’t completely materialize is preferable to a government borrowing programme that materializes suddenly towards the end of the year. The next one should have a fix on the Union government’s fiscal deficit. (There are separate issues connected with state budgets.) Expenditure will occur amid uncertainty. Some points to note: (a) We don’t know when covid-19 will completely ease off and when sectors with significant human interfaces (trade, hotels, restaurants, travel, transport) will get to open up, which is required for a full economic recovery. (b) We can guess but don’t know the efficacy and costs of vaccination. (c) Recommendations of 15th Finance Commission will have to be factored in, and a revamp of the central sector and centrally sponsored schemes (CSS-s) undertaken. (Without consulting states, it can’t be substantially revamped.) (d) There is a need to increase capital expenditure and support infrastructure. (e) Other than vaccine costs, health is a major concern and must be supported through expenditure. (Findings of fifth National Family Health Survey underline this.) (f) There are limitations on improving the efficiency of public expenditure immediately. (g) There were fiscal restraints in 2020-21.

A rosy growth scenario in 2021-22 doesn’t contradict the assertion that India’s absolute gross domestic product (GDP) level at the end of March 2022 will still be below that in end-March 2020. Pre-covid, what was trend rate of growth? Depending on the timeline used, something between 5.5% and 5.8%. That’s not good enough for India to meet its sustainable development goals, achieve a $5 trillion economy (with a new timeline), reduce poverty, ensure employment, or formulate a credible debt management plan. It’s axiomatic that, 2022-23 onward, we need to achieve 7%-plus real growth, and, having moved away from fiscal rectitude in 2020-21, public expenditure must support this. This brings up the question of a credible fiscal consolidation strategy, articulated in the Budget for 2021-22. The Centre’s fiscal deficit in 2020-21 will probably be around 6.5% of GDP. It can be projected at around 5.5% in 2021-22, provided assets are monetized. In 2020-21, the Budget introduced transparency by identifying off-balance-sheet borrowing; ideally, this should be included (around 0.8% of GDP) in the deficit number. But this can only be done if public sector unit disinvestment and strategic sales take place.

This will shape the Budget’s contours. Indirect taxes are in the Goods and Services Tax Council’s purview. (Cesses and excise on petroleum products are outliers.) Any real rationalization of GST rates will lead to a rise in average rates from 11.5% to a revenue-neutral rate of at least 16%. Amidst a tentative recovery, I don’t see that happening. Any real rationalization of direct taxes, with the removal of exemptions, will also mean an increase in average tax rates for several segments. I don’t see that happening either. But any budget, not just one setting out a path to recovery, is not only about revenue and expenditure. It’s also about policy content and intent. About messaging. In that respect, this Budget is as important as 1991’s. It should shape public expenditure in social and physical infrastructure, state a medium-term fiscal policy, detail an environment for private-sector investment, introduce reforms in land, labour and capital markets, and incorporate technology to improve governance. This sounds like a tall order. But that’s what big bang budgets are about—setting the tone for the next ten years. They aren’t about giving tax concessions to one sector or another. The exogenous shock of covid has provided an opportunity to do just that.

These are the author’s personal views.

Bibek Debroy is chairman, Economic Advisory Council to the Prime Minister

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