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The presentation of the Union budget is a constitutional requirement. Not an extra rupee can be spent without Parliament’s assent. Ideally then, the budget proposals should be thoroughly debated in Parliament. But due to time constraints and the party whip system, the Finance Bill gets passed quickly and mostly unchanged. Hence, much of the debate and discussion on the budget and wishlist items takes place outside, as part of extensive consultations prior to the Parliament session. This year, we need a big focus on growth and job creation. India’s recession calls for a massive stimulus. Much of the growth momentum will come from the private sector. Hence, what will be watched are the policy proposals and not just the budget’s size.

Of course, given the size and inertia of pre-committed expenditure, there is limited room for manoeuvrability on the spending side. For instance, nearly a third of all tax revenues have to be paid as interest on past debt. If you add salaries and pensions, as well as assured subsidies, there is very little left for new capital spending initiatives needed in areas like healthcare. Similarly, on the revenue side, with a strained economy, surely you can’t be raising taxes. Nor is there much room to reduce them. Moreover, in the post-goods and services tax (GST) era, decisions on indirect taxes and their rates are beyond the ambit of Parliament and in the domain of the GST Council. The best you can hope for is tax buoyancy caused by solid economic growth. The budget then is about signalling and psychology to an extent. To draw a cricket analogy, the finance minister is constrained to only hit straight drives between mid-on and mid-off, a batting style popularized by Sanjay Manjrekar.

The macro backdrop of the budget is eminently favourable, though, and not just because of vaccine optimism. Interest rates in India are at record lows. This is good for borrowers, be they home buyers looking for loans, companies planning new expansions, or the government seeking to fund its deficit. Additionally, dollar inflows are very high, both through portfolio capital and foreign direct investment. As a result, India’s stock of foreign exchange is the fourth highest in the world, and sufficient to fund imports and repayment obligations. Thanks to the Reserve Bank of India (RBI), liquidity is ample, which is a reason why stock markets are hitting all-time highs. Corporate profitability during the September quarter was spectacular, and lead indicators like the purchasing managers’ index for manufacturing have been bullish for several months now. The rural economy has done well, thanks to farm and non-farm incomes, notwithstanding the farmers’ agitation. Digital payments, exemplified by UPI transactions, are zooming.

What then are the worry points? The banking system, for one. Thanks to regulatory forbearance in the form of a moratorium and debt restructuring leeway, the day of reckoning has been pushed forward. It is possible that a nasty spike in non-performing loans awaits us. The budget then has to make substantial provisions for infusing public sector banks with capital. Either that, or be prepared to divest its stake aggressively. The entry of new private players, including both domestic and foreign banks, needs to be enabled. Credit growth has been tepid, as large firms haven’t embarked on big expansion plans. They have de-leveraged quite a bit, so that their balance sheets look better. Business and consumer confidence are like yin and yang, and feed on each other. The former awaits a spurt in consumer spending, and the latter, a surge in job availability. The budget would do well to provide a stimulus that goes directly into consumer pockets. How about extending the consumption voucher scheme widely, beyond just government employees? Or an urban counterpart to the rural jobs guarantee scheme, which is a proxy for unemployment insurance? Job creation remains the economy’s biggest challenge.

During this pandemic year, the fiscal deficit will probably overshoot the budgeted target by 5% of gross domestic product. To raise substantial resources for next year, the government should consider pledging shares of public sector undertakings for a direct loan from RBI. This can be structured as a 5-year repo loan transaction at a pre-decided low interest rate. At least 10 trillion can be got through this route. It can be used to fund major infrastructure and green- economy projects, apart from healthcare and skilling. Floating a sovereign dollar bond is an avoidable idea, but can be done through a proxy such as State Bank of India. Sovereign gold bonds should be sold aggressively, and on tap, to raise financial savings.

The fate of Indian exports and manufacturing is intertwined. The future of both lies in India attracting large global value chains, and that requires a clear commitment to openness. Hence the budget would do well to not further increase tariff walls, even though protectionism can be seductive. The budget should reiterate that Atmanirbhar also means embracing the world.

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