A reckoner of big issues to watch out for in the next Union budget

A credible growth target: We need a credible gross domestic product (GDP) growth target for 2022-23. The 9.2% estimate for 2021-22 looks good but not good enough. For one, it is severely K-shaped: i.e., better-off sections have done very well whereas the rest have done very badly. More importantly, it does not imply that the economy will necessarily do well next fiscal year. In fact, since the economy grew at 13.7% in the first half of the current year, the 9.2% forecast implies a slowdown in the second half to less than 5%. This is partly a reflection of pent-up demand trailing off, which could be made worse by the third wave of the covid pandemic.

Official sources have hinted that the budget will aim at GDP growth of around 7.5% for 2022-23. This is the right level to aim at if we want to see an expansion in employment and increased confidence among the youth about the future. Since it implies a considerable acceleration from the underlying momentum at present, it is relevant to ask how this will be achieved.

A strong demand stimulus is clearly needed. With capacity utilization at just over 60%, there is reason to believe that a demand stimulus would lead to a positive GDP response in the short run, without a risk of inflation, which in turn could trigger an investment revival if covid fears subside by mid-2022-23. Should the stimulus be directed at consumption or investment? The K shape of the recovery suggests that there is a strong case for continuing to support consumption at lower income levels through the 5kg free-food scheme (which could be extended for some more time) and also via the Mahatma Gandhi National Rural Employment Guarantee scheme, which should be fully funded to meet demand. However, the main stimulus should be through expanded public investment in infrastructure. India has a huge infrastructure deficit, which reduces our competitiveness, especially that of micro, small and medium enterprises (MSMEs). Accelerating investment in infrastructure will prepare the ground for a private-investment revival and the public investment push can be eased as private investment revives.

The National Infrastructure Pipeline, covering over 8,000 projects, was announced two years ago. It had a target investment of ₹111 trillion over five years. The Centre’s share, to be financed by the budget and the central public sector, was about ₹44 trillion. Implementation has lagged, as it often does, but the budget provides the finance minister an opportunity to indicate what has been achieved so far, and, more importantly, set an ambitious target for 2022-23, assign responsibilities and monitor implementation closely. The choice of projects could include those relevant for the climate change targets we announced in Glasgow, and also projects in health infrastructure where the pandemic has revealed huge gaps.

Fiscal deficit: The above approach implies that the fiscal deficit for 2022-23 cannot be reduced as sharply as many had hoped. It could be reduced from around 6.8% in the current year to, say, 6.3% in 2022-23. Financial analysts who follow our economy will be disappointed, but we must persuade them that we resorted to a much smaller stimulus than other countries in 2021-22, leaving room to do more in 2022-23. We remain committed to making a fiscal correction over the medium term, but a sharp contraction in today’s circumstances would be counterproductive. This is especially so since the Reserve Bank of India may have to start tightening monetary policy in view of rising inflation.

Public debate within the country on the deficit focuses almost exclusively on that of the central government, whereas what matters for a macro-economic balance is the combined deficit of the Centre and states. The finance minister was praised last year for making the Centre’s deficit accounting more transparent. She could gain further plaudits by starting to report the combined deficit. Since states can only borrow with the permission of the Centre, it should be easy to present an estimate.

Vaccination: It is increasingly clear that the effectiveness of a country’s vaccination programme affects international perceptions of its management capability. Last year’s target of vaccinating 100% of the adult population by end December 2021 was missed by a large margin. The finance minister could announce credible vaccination targets for 2022-23. This could include the date by when we now expect to have 100% of India’s adult population double jabbed, the target coverage of the juvenile population, and also the roll out of boosters for those who have had two jabs.

These targets should be backed by firm orders placed by the government with vaccine manufacturers to cover the requirement of the public programme over the next year. Vaccine makers should be allowed to sell the excess over this amount either to the private sector or through exports.

Tax reforms: There is little scope for change in direct tax rates. Corporate tax rates were lowered only recently and income tax rates are actually quite moderate. Where reform is really needed is the goods and services tax (GST). This was widely hailed as having the potential to increase the share of taxes in GDP. It has not done so and experts agree on the need for a basic structural change. There are far too many exemptions and rate slabs. Potentially important items such as real estate, electricity, petroleum products and alcohol remain uncovered. These changes can only be made by the GST Council, but the finance minister could use the budget to take the House into confidence by indicating the specific reforms the Centre would like to take up in the next GST meeting. A broad endorsement in Parliament with all parties participating would strengthen her hands in the GST Council.

The states have problems that need to be addressed. They complain that the Centre has reneged on its promise to compensate them for any shortfall in GST from what was projected. The compensation agreement also ends in June 2022 and the states want it extended for another five years. A possible constructive compromise would be for the Centre to agree to extend the compensation period by another three years in exchange for the states agreeing to a rate-structure reform. Breaking the logjam on GST with states will raise the credibility of our medium-term fiscal-correction trajectory, as it holds out the prospect of tax revenues increasing as a proportion of GDP over the next few years.

Banking reforms: These were promised in 2015, when the full extent of non-performing assets in public sector banks was revealed, but have not happened. Credit flows from public sector banks continue to be weak and this is not consistent with a strong economic revival with a push for MSMEs. The privatization of two public sector banks is clearly lagging. Privatization is politically problematic, but it is not the only route to banking reform. The P.J. Nayak Committee had suggested ways of reforming public sector banks even without reducing the government’s equity share below 50% by reducing the finance ministry’s control over them. Bureaucrats are understandably reluctant to reduce their control, but ministers can rise above this. We have to wait until 1 February to see if there will be movement on this front.

Montek Singh Ahluwalia is former deputy chairman, Planning Commission, and currently distinguished visiting fellow at the Centre for Social and Economic Progress