Home / Opinion / Columns /  Three things that will make the budget work for India

Disequilibrium promises to be the new equilibrium. The time has come for economics to move away from balanced equations and precise formulae, or attempts to link societal value with financial values. As a start, the Budget will have to refocus its efforts on delivering economic and social benefits to those left out. By the time this column appears, the Budget will be fully baked and oven-fresh for presenting to Parliament and the nation. It will also undoubtedly include many new schemes and resuscitate many existing ones. So, this column will do the next best thing: provide some broad pointers, notwithstanding the specific Budget measures.

Finance minister Nirmala Sitharaman had the unenviable task of drafting this Budget in the midst of two sets of challenges. In general, humanity’s current and future challenges: known and unknown health-related risks that could further imperil our economic future, the inability of existing economic prescriptions to solve the current phase of slow growth and rising inequalities, a heating planet in the pursuit of growth-at-any-cost objectives, and, the emergence of a capitalist strand that is inimical to democracy and democratic norms. In particular, she has to also contend with India’s unique problems: low employment, farm-income uncertainty, a slowing investment rate, social unrest, crumbling physical and social infrastructure (including primary education and healthcare), haphazard urbanization, among others.

Multiple indicators show that the road to an improved Indian economy, including higher economic growth, has government right at the forefront, and not markets.

The first priority is meeting the slowing economy’s unfulfilled appetite for fiscal stimulus and a felt need for state intervention. The Reserve Bank of India (RBI) used record low interest rates and surplus systemic liquidity to keep the economy’s keel even, in the absence of a meaningful government intervention. The combination of grants, equity and liquidity measures through all the Atmanirbhar packages added up to a fiscal impact of only 1.8% of gross domestic product (GDP). As data from International Monetary Fund showed, India was way behind other countries on this count. Surprisingly, though a bit late in the day, Economic Survey 2020-21 is now emphasizing that it’s okay to spend when the going gets bad. The survey acknowledges what this column has consistently advocated: a counter-cyclical fiscal stimulus, untrammelled by credit rating apprehensions. Some catching up needs to be done, but, before we shift gears, it is important to first reconfigure the dashboard: instead of monitoring the fiscal deficit to GDP ratio as a key budget parameter, as convention demands, policymakers should focus on the gauge of India’s negative output gap, so that attempts to pump-prime the economy do not end up reducing this gap in such a manner that it ignites inflationary flares.

Part of this can be achieved by state investment. The first advance estimates for 2020-21 project gross fixed capital formation slowing down to 24.4% of GDP, way down from the high of 34.3% in 2011-12, and 30.1% of 2014-15, when this government first took charge. At the granular level, while the government’s share has remained largely unchanged, it’s the private sector’s sharply lower contribution that has pulled down the total. The only way to reverse this is for the government to step up to the plate.

Second, if high-quality growth—and not just a high growth rate—is the end objective, then the frayed state of federalism needs nurturing back to health. States managed the direct fallout from the pandemic: providing healthcare to the pandemic-affected, delivering economic stimuli, and managing to provide sustenance to citizens despite restrained budgets and dwindling transfers from the Centre. States are the Centre’s delivery mechanism for not just a whole host of Central social sector schemes, but also for overall economic growth. Yet, as revenue sources dried up, the Centre’s parsimony in releasing funds to the states, and tying these funds to achieving a set of structural long-term reforms, has proven to be counter-productive. Of 3.2 trillion made available for implementing these long-term reforms, a measly 16% or only 516.82 billion was borrowed till end-2020. Clearly, economic reforms cannot be shoved top-down or done without stakeholder buy-in.

Delivering the annual L.K. Jha Memorial Lecture at RBI in November 2019, N.K. Singh, chairman of the 15th Finance Commission, made numerous suggestions for improving fiscal federalism, which included reviving institutional mechanisms for Centre-state policy dialogue.

The third accelerant will be green technology. The government is committed to increasing renewable energy generation, converting fossil-fuel consumers (such as, automobile owners) to clean energy, and lowering the nation’s overall carbon footprint. However, what seems to be missing is the link between government’s broad intent and a roll-out of the necessary infrastructure that will allow the last human being to access clean energy. For example, while there is some traction on the proposed switch to electric cars, there is no visible action on providing accessible charging infrastructure across the country.

It has now become increasingly evident that a larger and healthier economy in 2021-22 onwards will need a higher level of government involvement and commitment, alongside markets.

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

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