A budget for a ‘project finance economy’
This year’s budget revealed the mindset of a confident and unapologetic India. In this newspaper, on January 22, I had argued for the need for developing economies such as India to view themselves as “project finance” economies and not “working capital” economies of the developed West. While a developed economy has good infrastructure, near-full employment and high per capita income so that it has the revenue base to meet its expenditures, a country with low per capita income, high disguised unemployment and poor infrastructure needs to borrow to meet its required expenditures.
Project finance economies need to build the infrastructure lacking in their nations so that they can increase the productivity of their economies. Sustainable growth in Gross Domestic Product cannot be achieved without plugging the gap in hard and soft infrastructure. What is important is to ensure that the borrowing is well-directed and spent on the right things. It is in this context that I applaud this year’s budget.
Finance minister (FM) Nirmala Sitharaman was not coy in signalling to the world her intent to spend to grow out of the pandemic. She was not cowed down by the constraining orthodoxy of neo-classical economic thinking that inhibited action in the past. The budget was bold and unafraid in a crisis year. It combined pragmatism in some areas, with a bold attack on the traditional holy cows of old and did not fall prey to ineffective symbolism and needless populist tinkering.
Sitharaman broke with the constraint imposed by the Fiscal Responsibility and Budget Management Act. It transparently accounted for expenditures and openly stated the true deficit this year at 9.5% and targeted a deficit of 6.8% next year. She was clear that critical spending on infrastructure, health and education could not be delayed if India was to recover its old growth path. Revenue expenditures and some subsidy allocations were reduced, but capital expenditure was sharply increased. All this was done without tinkering with direct taxes and only some minor adjustments in tariffs and indirect taxes. Policy signalled consistency and an attempt was made at reducing tax harassment by reducing the time frame within which tax cases could be taken up and tried.
The outlay for hard infrastructure was increased to ₹5.54 lakh crore from ₹4.39 crore spent this year. The allocation was spread on roads, rail, urban infrastructure, ports, shipping, waterways, and airports. Another important area which continued to attract focus was water (₹2,87,000 crore allocation over five years) — a key requirement for the population, a basic human need which brings important side benefits in respect of health and hygiene. State power distribution companies were, at the same time, asked to get ready for competition to shake up this vital sector.
The pandemic had put a focus on India’s crumbling health care system. The finance minister increased allocation for health care to ₹22,3846 crore as against ₹94,452 crore this year, a 137% increase, with ₹35,000 crore of that amount earmarked for vaccines. The signal here is very important but we all recognise this to be a multi-year journey. Perhaps some more could have been done for education and skilling, but one hopes it is recognised as a critical area for coming budgets.
The measures for the financial sector were long-overdue. The finance minister announced the reversal of the policy on development finance institutions by setting aside ₹20,000 crore to establish one to supplement the needs of India’s infrastructure. She also announced the setting up of a bad bank to facilitate the resolution of bad loans and cleaning up of bank balance sheets to spur credit growth in the economy.
But the announcement of privatisation, yes privatisation, of two public sector banks in addition to IDBI Bank, one general insurer, the listing of Life Insurance Company and allowing 74% foreign investment in insurance, were pathbreaking. To raise resources for these expenditures, the government wants aggressive disinvestment and asset monetisation. In addition to providing resources, these actions increase the efficiency of the sectors and signal a return to the maxim of maximum governance minimum government.
My two concerns on the budget relate to implementation. First, we must ensure the divestment targets are met unlike in the past. Divestment is always political, complicated but vital. Second, the government should earmark a certain minimum spending on soft infrastructure and target outcome goals it monitors and share these with the nation in Parliament. Outcomes in health and education are as important as sharing the fiscal deficit figure. The government should focus on the level of monitoring required — a monthly FM-led review and a quarterly prime minister-led review — to ensure the programme stays on track.
This budget boldly espoused a “project finance” economy mindset — based on spending with confidence on hard and soft infrastructure to improve the productive capacity of the country. FM Nirmala Sitharaman deserves high praise for betting on unlocking India’s full potential and setting it on a path to growth. I doff my hat to you, Madam FM.