Union Budget: The FM should stay the course
Budget expectations is a game of competing interests jostling for the mindspace of policy makers. From industry forums to parliamentarians, all push divergent, interest-based agendas. The finance minister (FM), however, has the unenviable task of making judicious decisions to maintain the delicate balance in a struggling economy which, by definition, will not please all. But astute corporate leaders know that a popular CFO is a red flag — the nation’s CFO is no different.
I will, therefore, leave partisan expectations to specific interest groups, and share the larger macro picture. I wrote last year that the budget of 2021 could well be the 1991 moment for the National Democratic Alliance (NDA) government, post many false starts since 2014. Finance Minister (FM) Nirmala Sitharaman made three key fundamental changes to India’s economic trajectory in 2021.
One, she showed remarkable resolve to push second-generation reforms, facilitate growth and a definitive capital formation path through debt, but without additional resource generation from higher taxation, while remaining on a defined, credible fiscal glide path.
Two, she departed from the usual accounting sleight of hand while presenting the financials and three, she pushed alternative means of non-tax financing of deficits, which is far more productive in releasing the animal spirits of its entrepreneurs, and attracting investors.
A year later, the results are evident even though we faced a devastating second Covid-19 wave, enhanced defence needs precipitated by geopolitics, and coped with surging global commodity prices apart from supply bottlenecks and global shortages. High-frequency data indicate a broad-based pick-up, albeit with a few distressed contact-intensive service sectors, strong Goods and Services Tax (GST) collections, purchase managers index (PMI) expansion and, most encouragingly, manufacturing revival-led export growth (which is at an all-time high). Capital formation has been the highest with a 13.5% growth till November and, given the lumpiness and upcoming supplementary grants, we could possibly achieve the ambitious 30% year-onyear (YOY) growth planned.
Resource mobilisation has been highly encouraging with revenue receipts already at 76% of budget estimates till November. A 67% YOY growth fuelled by surging trends in both tax and non-tax revenues indicate all-round upbeat sentiments in economic activity in tandem with tax efficiency. Only divestment continues to disappoint, though Life Insurance Corporation of India is still on track for the current year.
Very creditably, the expenditure side, too, is well on target with marked improvement in the quality of spending with capital expenditure growing more than revenue expenses. This bodes really well for the budgeted fiscal deficit target of 6.8% even in this difficult year and indicates the government’s seriousness for fiscal prudence.
Parallely, private capex too is significantly higher than in the last 10 years, and aggregate cash flow from operations of listed companies is robust at twice their capex spend for the half year. Along with low interest rates and improving capacity utilisation due to massive government spending, we are perhaps on the cusp of a virtuous capex-led investment cycle which has eluded us since the 2009 global crisis. Financing ability of approximately ₹22 lakh crore — in line with the National Investment Pipeline forecasts — seems doable provided the mega capex outlay is continued. This will add to the momentum of capital formation.
Given the above, I would think the FM should just continue on the path she chalked out last year. Though difficult in a critical election season, she must resist pressures and not tinker with what is not broken.
Having said this, there are few additional areas that merit attention and will also be acceptable as election sops.
First, India is among the most unequal countries in the world with the top 10% garnering 57% of the national income and the bottom 50% only 13 %. This gap has widened in the last decade with a 20x disparity on an average income basis. Second, I believe that the rural economy is the bedrock of this country, which can progress through targeted interventions by the private sector.
The setback to the farm laws must be reversed through new schemes, which are politically acceptable and openly debated in Parliament. Third, real wage growth has been close to nil since 2014. Fourth, we must re-engage with trade blocs to push non-software exports. Lastly, structurally crippling expensive capital due to a traditionally troubled financial sector requires the continuance of reforms such as the bad bank initiative of last year.
Understanding government balance sheets is key to interpreting its policy actions: The balance sheets’ structure , and changes thereof, provides significant insights into their goals, their efficacy, and policy consistency, over time.
Thus, implementing significant reforms requires patience, tenacity and economic consistency before results become evident. India is on the right track after a long while — at least on the economy — and I hope the path of economic consistency will be maintained through a calibrated fiscal consolidation path, an investment-led growth and incremental resource mobilisation through non-tax means. We must resist growing temptations of reverting to the populist and protectionist policies of the past.
Aristotle explained the concepts of “techne” (craft), “episteme” (science) and “phronesis” (ethical judgement) as the three distinct types of contrasting knowledge skills required to solve the most complex problems. The FM demonstrated the third last year as a capital allocator and policymaker when competing factors are at play with multiple potential options, and no absolute answers.
She will need to harness all her perspective and wisdom to ensure she makes the right judgment once again, despite political leaders pushing their views — as seen from the lens of their well-known perspectives to win elections — which generally are in stark conflict with the needs of the Indian economy.
Stay the course, Ms Sitharaman.