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Our cricket XI played to a plan and so must the budget

**HANDOUT PHOTO MADE AVAILABLE FROM FINANCE MINISTRY ON TUESDAY, DEC. 22, 2020** New Delhi: Union Finance Minister Nirmala Sitharaman during a pre-budget meeting with industrialists, at North Block in New Delhi, Tuesday, Dec. 22, 2020. (PTI Photo) (PTI22-12-2020_000039B) (PTI)Premium
**HANDOUT PHOTO MADE AVAILABLE FROM FINANCE MINISTRY ON TUESDAY, DEC. 22, 2020** New Delhi: Union Finance Minister Nirmala Sitharaman during a pre-budget meeting with industrialists, at North Block in New Delhi, Tuesday, Dec. 22, 2020. (PTI Photo) (PTI22-12-2020_000039B) (PTI)

The finance minister should work out revival measures that make for grit and resilience against the odds

When finance minister Nirmala Sitharaman rises in Parliament on 1 February to unveil Budget 2021-22, she must cast a glance towards the beleaguered Indian cricket team Down Under. The Sydney Test match between India and Australia ended in a fiercely contested draw, but has left a dressing room full of injured Indian players. This is a record of sorts: No other touring Indian team in the recent past had so many injured players. The Board of Control for Cricket in India, the administrative and regulatory authority for Indian cricket, has a lot of explaining to do. The question uppermost in everybody’s minds is whether it failed, deliberately or otherwise, to disclose the existing injuries of team members.

What do cricket injuries have to do with Budget 2021-22? For one, while band-aids and patches can heal some of the Indian cricket team’s injuries, the Indian economy needs solid, medium-to-long-term fixes. Second, this is a splendid opportunity to make a clean break from the dogmas and orthodoxies of the past, which inhibited the government from making an all-out effort to address the pandemic’s economic fallout. Budget provides an opportunity to avoid BCCI-like prevarications and initiate tangible fiscal relief.

The government’s fiscal support should not be restrained by debt-to-gross domestic product (GDP) or an arbitrary deficit-to-GDP ratio; its focus should be to help reduce the negative output gap without stoking inflationary fires. In short, like good batsmen, the government must keep its eyes on the price line while providing fiscal stimulus. The road to a reduced output gap (and higher output and income), and a stronger and injury-free Indian economy, must traverse five important milestones.

First, higher infrastructure expenditure is a no-brainer but needs a nuanced argument. Research shows states spend more than 50% of the nation’s infrastructure expenditure; also, states’ capital expenditure has a higher growth multiplier than the Centre’s. It is thus in the Centre’s interest, and in true federal spirit, to allocate higher funds to states for capital expenditure; if necessary, the Centre should even borrow and pass on the proceeds. As part of its own infrastructure spending, the Centre should ensure funds stuck in disputes with various government agencies are released. Many of these disputes are specious and resolving them eliminates another systemic ill: bill over-invoicing as a reflexive hedge against future disputes.

Second, banks will have to crank up credit engines to get the economy humming once again. Bank credit till mid-December on a year-on-year basis was a shade higher than 6%, and the 11 January edition of the Financial Stability Report from the Reserve Bank of India (RBI) shows reduced credit demand during April-October 2020 has improved the capital to risk-weighted assets ratio (CRAR) for scheduled commercial banks: from 14.7% in March 2020 to 15.8% by September 2020. But, as always, there’s a catch: against 18.7% for foreign banks and 18.2% for private sector banks, it is only 13.5% for public sector banks. In addition, RBI warns these numbers might be artificially high because regulatory forbearance over the past nine months may be shielding potential bad loans. Long story short, banks—especially state-owned—will need additional capital to play any meaningful role in the economic revival process. The government has been shoring up bank capital so far through book entries: banks buy special government bonds, then these proceeds are reinvested as bank’s capital. It is perhaps time to review this and replace it with fresh incremental capital, because state-owned banks will face relatively higher credit demand when economic activity revives.

In the public sector domain, thirdly, the government also needs to harness other public sector units (PSUs) as critical vectors in the revival process. The first step should be to stop demanding higher dividends from these units every year. The government’s dividend receipts from PSUs (barring RBI, nationalized banks and financial institutions) increased by almost 70% in the past five years: from 28,423 crore in 2014-15 to a little over 48,256 crore in 2019-20. Even a fraction of this money invested in capital projects is likely to yield a multiplier effect, despite the traditional drag on capital productivity in India.

Fourth, retaining the PSU focus, the government must keep selling small parcels of its shareholding, instead of waiting for the right moment to complete a blockbuster privatization, which may also not be desirable in the current circumstances. Ongoing stake sales will keep the non-tax revenue channel lubricated as tax revenue takes time to pick up. This way, the government manages to part-monetize investments and part-finance its budget, without losing control.

Finally, if the government is planning to incentivize private-sector investments, it must make special provisions for companies planning labour-intensive capital expansion. The burgeoning unemployment numbers present India with myriad problems and should be a priority for the government.

The healthcare emergency and economic conditions are making specific demands on this budget. An exigent strategy would require Sitharaman to make it all about substance, not style or rhetoric. It’s a bit like the Indian cricket team, which, injured and pushed to the wall at Sydney, dug its heels in and opted for a draw because losing the Test was not an option that day.

Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.

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