The Union Budget will unleash animal spirits and enthuse investors
Finance minister (FM) Nirmala Sitharaman has delivered a truly historic and ambitious budget. It comes after a year of economic contraction caused by the pandemic and lockdown. The initial national priority was to save lives against an unseen killer virus, and hence the harsh lockdown, which resulted in a demand and supply shock.
India has been exceptionally successful in “flattening the curve” and keeping fatalities low. But as we prepare for the post-pandemic economy, we needed a big fiscal boost. This has led to the usual dilemma of whether to obey the diktat of fiscal prudence or to tilt towards fiscal extravagance. The Economic Survey had clearly indicated its preference towards fiscal expansion. The FM correctly identified that the need of the hour is to be bold, unafraid of rating agencies, and that is what the budget provides.
The strong growth stimulus is in the form of a much higher allocation for spending on infrastructure. The benefits of infra-assets that are thus created, whether in terms of roads, highways, ports or airports, are for the benefit of several generations into the future. Hence, it makes sense to finance them with resources raised from both the current and future unborn taxpayers, that is to say, from current taxes and future borrowing. And, thus, the enhanced spending relies on a higher fiscal deficit of about 6.8% of Gross Domestic Product (GDP) to be brought down to 4.5% in the next four years.
This is a credible, honest and realistic glide path of debt financing. It is also sustainable because, as such, India’s debt-to-gdp ratio is on the lower side, as compared to its G20 peers. The world is currently awash with plenty of liquidity and the extremely low interest rate regime will continue in the foreseeable future. India’s high growth potential is attractive to global funds seeking a higher return.
By making it easier for foreign sovereign wealth and pension funds to invest in India’s infrastructure, the budget has greatly improved the outlook for infra development in the next few years. It will lead to massive construction activity, and also create significant employment. And such public investment will crowd in more private investment, and will reduce logistics and transportation costs and increase industrial productivity. There is a considerable push given to the creation of large-scale affordable housing, which is also part of infrastructure. The budget provides money for the creation of a development financial institution which can access long term funds for long gestation projects.
Beyond hard infrastructure are health and education sectors, which can be called India’s soft infrastructure. Investment in them enhances human capital and increases longterm growth rates and prosperity. The budget has correctly given extra emphasis on these two social sectors, especially creating a widespread network of quality primary health and education centres. India has to more than double its expenditure on health, as a share of GDP, to be comparable to peer countries. It has a proven capability to synthesise the lifesaving vaccine, which is now also being exported to other countries. Beyond the pharmaceutical sector, the other parts of the entire health care sector need much more funding, which this budget has provided.
The other notable feature, described as one of the pillars which form the basis of the budget, is the role of the private sector. The FM called it the asset monetisation programme which has been ongoing, and will now be accelerated. That means that several public sector entities will be opened up for this investment or privatisation, including two prominent public sector banks as well as a general insurance company owned by the government. The government intends to get out of all non-strategic sectors, leaving them for the creative energy and innovation of the private sector.
This historic budget is sure to unleash animal spirits and enthuse investors. The virtuous cycle of consumer and business confidence is what is needed to take the economy into the high growth orbit. Only high economic growth can create the resources needed for a just and inclusive society.