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If last year’s budget was about pulling India’s economy out of a covid pit, this year finance minister Nirmala Sitharaman will have to ensure that the ongoing recovery does not slip. She must take into account the complexity of changed circumstances, with the risk of inflation on the rise. Fiscal support will have to be kept up, even as the Reserve Bank of India (RBI) is given space to gradually withdraw an extraordinary monetary stimulus that has played a major role as an economic prop for two years but must not expose us to further price instability. While social spending on food and job hand-outs was duly enlarged as pandemic relief, a low-cost credit push formed the bulk of the Centre’s aid for enterprises, with a special package for small ones. From here on, however, our economy will have to rely more on fiscal help. While many sectors have their own revival momentum, this is not so of each sector. Crucially, capital can’t get any cheaper, as a failure to turn loans dearer in 2022-23 could scrunch what our rupee can buy. This peculiar scenario means all eyes would be on the budget’s fiscal deficit proposal.

Encouragingly, by the end of 2021-22, our economy is expected to have regained its output loss of 2020-21. But growth impulses remain both tentative and uneven. The on- going wave of covid may prove less disruptive than the past two waves, but the pandemic’s K-shaped divergences in how we have fared look unlikely to ease. This calls not just for an expanded outlay for India’s worst hit, but also conducive conditions for battered businesses to stabilize, recruit people and raise salaries. With jobs scarce and incomes more scarred than swollen, direct cash transfers could yet give consumption and thus investment a fillip. Of course, an infrastructure thrust would be welcome, not least for its multiplier effect on earnings. At this juncture of India’s emergence, a big build-up kept in sync with skill development aimed at making up for our long neglect of public healthcare and education would prove especially helpful. Big allocations need not amount to ‘big government’ in its dirigiste sense if simultaneous reforms relieve markets of needless interventions. The stimulatory benefits of all this will depend on execution speed, which may need to pick up. For this year, the Centre had planned a 30% step-up in capital expenditure; how it panned out would presumably dictate next year’s capex plan.

As always, the hard part is funding fresh outlays without overtaxing the country. Or, for that matter, letting a rescue turn into profligacy that could fan inflation and cause major macroeconomic shudders of the sort seen about a decade ago. Adherence to the fisc’s reset glide path to under 4.5% of gross domestic product (GDP) by 2025-26 would signal fiscal resolve. In next week’s budget, we must aim for a deficit lower than this year’s likely 7%-of-GDP or so, but even hawks would admit that a sharp pullback could leave the revival short of pep. A target that’s only half a percentage point less would be fine, and if overall demand gets a boost that stirs ‘animal spirits’ in 2022-23, the Centre could cut back and cede a bigger slice of our lendable-money pie to private investors. Swelling tax revenues should help. Asset sell-offs, alas, can’t be counted upon as coffer-fillers until such plans are armed for encounters with reality better than the record so far. All in all, the hard part will only get harder as the US Fed tightens policy and prudence pushes RBI to focus on securing the rupee’s value.

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