PremiumThis budget could set a glide path and action plan aimed at eliminating the revenue deficit entirely over a five-year period, says Duvvuri Subbarao, the former governor of the Reserve Bank of India
Dear Finance Minister,
You’ve had baptism by fire like no other finance minister before you. It would have been nice, sitting in your splendid office in North Block, to steer the economy towards $5 trillion. Instead, growth slumped shortly after you took over, and then covid engulfed the economy. But do remember the Readers’ Digest First Person Award Story—‘burden falls on those shoulders that can bear it’.
You are also facing an ironic situation like none of your predecessors. The preaching to them used to be: “Be responsible. Cut spending." Instead, the gospel offered to you is: “Be responsible. Spend more." This should be music to the ears of a finance minister. That it is not is a sign of our depressed times and an illustration of the dilemmas you are confronting as you make the next budget.
Having once been finance secretary, I can imagine the deluge of unsolicited advice you must be getting. But I am unable to resist the temptation. So, please do bear with me as I add to your already-long reading list.
Let me lay out my advice as logically as I can.
In The Deficit Myth, one of the notable books of this year, Stephanie Kelton writes that “governments should stop elevating abstract ledger entries over the needs of flesh-and-blood human beings." I gather from a recent statement of yours that either because of similar advice or otherwise, you are now more comfortable about loosening the government’s purse strings to launch a more sizable fiscal stimulus. An important decision you will have to make is on whether to spend this on supporting consumption or supporting production. I believe your bias should be towards the latter.
Among the smart things you’ve done this year is to expand the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) scheme; that was wise, as MNREGA is self-selective and reaches the neediest. Do continue to support MNREGA, but beyond that, it is more efficient to help the poor through jobs and livelihoods than by giving them hand-outs. To weather this hardship, the poor have run through their savings. If you give them money now, they will use it to rebuild their savings rather than spend it, defeating the purpose of a stimulus.
There are several options for stimulating production. One of the unfortunate consequences of this crisis, around the world and here in India too, is that it is accentuating inequalities. Large corporations and big industries have been able to withstand the shock; some have even thrived on it. But the large majority in our vast informal sector have seen their fortunes worsen. This is morally unfair and politically corrosive.
It is also bad economics.
The country’s potentially huge consumption base is our biggest growth driver. You assure the poor a regular income, and they’ll spend, which will spur production, which, in turn, will lead to more jobs and more consumption, and we can get on to a virtuous cycle. On the other hand, if they’re condemned to a harsh and uncertain future, consumption will be low and the entire economy will go into a downward spiral. For reasons of space, I am not able to expand on this theme, but you get the gist.
Where will you get the money from? You will of course want to minimize borrowing. The straightforward option is to disinvest aggressively. Sadly, every budget promises massive disinvestment and every budget disappoints. In selling public assets, you owe it to the country to be prudent, but too much prudence can lock you into indecision. The stock market is on a roll. If not now, when?
Aggressive disinvestment is necessary, but not sufficient. You will need to borrow more. One option for raising debt is issuing covid bonds directly in the market. That has several merits. Appropriately designed, it will provide an attractive option to savers who are being short-changed by low interest rates in the face of above-range inflation. It will also not add to money supply on a net basis, and therefore will not burden the Reserve Bank of India’s liquidity management.
By far, the biggest challenge you will face is convincing your interlocutors that this ‘borrow and spend’ programme is fiscally sustainable. For reasons unclear to me, the revenue deficit has gone off the radar. You should resurrect it, if only for the purpose of virtue signalling, and commit to eliminating it over a five-year period. I am suggesting this rather than reducing the fiscal deficit because this is a more robust path to fiscal sustainability.
Mere words will not do. You have to set a glide path and initiate an action plan for achieving that trajectory. I know what you are thinking. No, not another expert commission; we’ve had enough of them. Promise in the budget that you will come up with an action plan within three months, and get to work soon after that.
To get to a zero revenue deficit, you need to both increase the tax intake and slash recurring expenditure. It won’t be wise to get into the nitty-gritty of expenditure compression. Just do the arithmetic and ask every department of the central government to cut recurring expenditure by a formula-determined percentage every year for the next five years. Your colleagues will balk, cry foul and blame every failure of theirs on budget cuts. Don’t budge. From my experience as finance secretary at the state and central levels, let me tell you that it’s rational to be wooden-headed on an issue like this. Indeed, nothing else will work.
To sum up, my unsolicited advice to you is: Don’t waste this crisis. Use this “act of God" as an opportunity to push through politically-difficult fiscal reforms. And unlike St. Augustine who asked, “God, give me continence, but not yet", I believe you should bite the bullet, and do so now.
Madam, my best wishes for every success.
Duvvuri Subbarao is former governor of the Reserve Bank of India and former finance secretary, Government of India
