What the Union Budget needs to get right
India’s economic recovery has been impressive, but there are gaps. In the budget, focus on public spending, enhancing demand, job-oriented growth, health and the financial sector
Finance minister Nirmala Sitharaman’s problem is the same as that of the Indian cricket team’s captain — everyone seems to think they know what needs to be done; worse, everyone is convinced they can do a better job than the incumbent. There have been a spate of if-I-were-the-finance-minister pieces published already, and more will follow after Sitharaman presents the Union Budget for 2021-22 on February 1, accompanied by that annual (and juvenile) exercise of a bunch of worthies lining up to rate the budget out of 10.
The context of this Union Budget is like no other. Not even 1991 was like this (and India’s macroeconomic vitals are far healthier now than they were back then). The economy was already (and consistently) slowing ahead of the pandemic — for both structural and cyclical reasons. Then came the pandemic, the lockdown (68 days long) enforced to slow its spread, and the gradual (but faster than expected) return to normalcy of most business activities, although the damage on small firms, those employed in the informal sector, and many businesses in the service sector has been severe.
The International Monetary Fund expects the Indian economy to grow at 11.5% in 2021-22 and 6.8% the year after, by far the fastest for an economy of this size. The 11.5% growth translates into a 2.9% growth over 2019-20, and while some analysts say this means there’s no reason for cheer, the speed of the economy’s return to normal has been staggering. The Economic Survey’s estimate is almost the same — 11%. This is a classic V-shaped recovery, but there are issues.
Sure, the corporate sector appears to have bounced back (if one were to consider profitability), but this has come on the back of lower costs, usually achieved through layoffs or salary cuts. Sure, the stock markets are booming on the back of excess liquidity in global markets, of a magnitude not seen for at least a decade-and-a-half, but there are few jobs being created. And sure, several highfrequency indicators are in the green, highlighting an ongoing sequential recovery, but there are questions about its sustainability. Just as there are questions about investment and consumption, and credit and demand.
Interestingly, there is growing convergence, if not complete agreement, on five things about the Union Budget.
The first is that the government should continue with its expansionary fiscal stance in the budget (which the Economic Survey also emphasises). Put otherwise, it should spend, and spend liberally. Sure, some of the spending will have to be on productive assets such as infrastructure, but from the shortterm perspective, some of it should also focus on alleviating the significant economic distress in which some people (and companies) find themselves.
There is a fiscal responsibility law, which the government is expected to follow, but the circumstances are unique enough for this law to be held in abeyance for, say, two years. Just remember that Indonesia monetised some of its deficit in mid-2020 as part of its effort to manage the economy during the pandemic. The move, had it come a few years back, would have been roundly criticised by everyone. In 2020, it barely caused a ripple in global financial circles — and that, only because of a school of thought that this could be a road other developing economies could take. Chanakya isn’t enough of an economic heretic to suggest India do the same, but the country can definitely go as far as simply not worrying about its mandated deficit targets (which it will anyway miss).
The second is that as the economy comes out of the crisis of 2020, the finance minister would do well to ensure the strength and stability of the financial sector. The Economic Survey has called for an asset quality review, especially because of the regulatory forbearance banks were allowed in a pandemic year — something that essentially allowed them to maintain low provisions against what were basically impaired assets. It was similar regulatory forbearance (in the early 2010s) that resulted in ongoing non-performing assets (NPA) or bad loans crisis. India doesn’t just need an asset quality review; it also needs to consider creating a bad bank, an idea it has flirted with in the past, but one whose time has perhaps come.
The third is for the budget to make a higher allocation to health in general, and Covid-19 vaccines in particular. The latter is perhaps the best stimulus the government could provide the economy. After all, at least some of the problems that beset the economy currently have nothing to do with the economy (and everything to do with the pandemic). The sudden health crisis India encountered last year showed up the inadequacy of the country’s public health infrastructure. The Economic Survey makes a pitch for taking up India’s health spending from the current 1% to 2.5-3%.
The fourth is for the budget to do enough to revive demand — a problem even before the pandemic, and an even more pressing one now. According to the Economic Survey, the sharp recovery in the second half of the year was powered mainly by a rise in government consumption. Private consumption is expected to contract by 0.6% in the second half, although this is an improvement over the almost 19% contraction seen in the first half.
And the fifth is for the budget to come up with a growth formula that is built around jobs. There is now enough data to show that a significant number of jobs were lost during the pandemic, and that some of those still in jobs have seen a fall in incomes, with the poor affected disproportionately by both.
The important thing to remember as we prepare for Budget 2021-22 is that things could have been worse, much worse. But whether they get even better from here depends on what happens on February 1.
THE CONTEXT OF THIS BUDGET IS LIKE NO OTHER. NOT EVEN 1991 WAS LIKE THIS (AND INDIA’S MACROECONOMIC VITALS ARE FAR HEALTHIER NOW THAN THEY WERE BACK THEN). THE ECONOMY WAS ALREADY SLOWING AHEAD OF THE PANDEMIC — FOR BOTH STRUCTURAL AND CYCLICAL REASONS