Will Olivier Blanchard, the French macro-economics professor who was Chief Economist of the International Monetary Fund from 2008 to 2015, be the guiding light of our Finance Minister Nirmala Sitharaman’s “never-before” budget to be presented this Monday?
Few in India may have even a nodding acquaintance with Blanchard, who was quoted by Chief Economic Advisor, KV Subramanian, during the presentation on his Economic Survey to the media on Friday.
“If the interest rate paid by the government is less than the growth rate, then the intertemporal budget constraint facing the Government, no longer binds,” Blanchard had said and Subramanian went on to explain that “if the interest rate is lower than the growth rate, then the debt to GDP will decline”.
It is economic growth that leads to debt sustainability is the unambiguous message that he wanted to convey almost urging the government to go for an expansionary budget.
It is public expenditure that will crowd in private expenditure at this point in time and by all accounts it seems that the 2021-22 budget will be catalytic in character.
The national economy is expected to grow by 11% in 2021-22 riding on a negative growth of about 7.5% in the current financial year, which means that the GDP in absolute terms could be higher by just about 3 per cent over the absolute level of our economy in 2020. (11 minus 7.5 with approximations)
In content, vision, strategy and action this budget will have to bring at least the heft and vigour of the reforms-oriented presentation by Dr. Manmohan Singh in July, 1991. More than anytime in the recent past, this is the time to combine steps for some deep-going structural reforms along with the usual annual tax proposals/outlays for various programmes, which all budgets contain.
We can then divide the budget prognosis into two components: one to do with structural reforms and the other on taxes cum outlays.
In my view, the following four pillars could provide support for the reforms part.
• The government has listed 7492 projects under its Rs 111 lakh crore National Infrastructure Pipeline for the period up to 2025. Investments have to be attracted for infrastructure development in Transport, Energy, Water & Sanitation, Social & Commercial infrastructure and Logistics (https://indiainvestmentgrid.gov.in/national-infrastructure-pipeline).
The budget will have to announce either the creation of a new Developmental Financial Institution or expansion in the scope of activities of existing structures like the National Investment and Infrastructure Fund, which is India’s first sovereign wealth fund. Higher expenditure through public-private partnerships will boost growth, provide jobs and create demands for the core sectors like steel and cement.
• The time has come for the Government to stop being shy of disinvestment in public sector units. Under Atma Nirbhar, the Government stated that it will limit the presence of PSUs to one to four in strategic sectors and to privatise, merge or bring the remaining companies under a holding company. Companies in non-strategic sectors would see the government exiting completely. Defence, Atomic Energy, Railways, Banking and Insurance are some of the strategic sectors. Already, BPCL, Air India, Container Corporation and Shipping Corporation are listed for disinvestment apart from LIC. This budget should announce a list and a timeline for this process. Smaller PSU banks could also be privatised.
• Higher public investment in healthcare will have to be a policy reform on an ongoing basis. The Economic Survey itself has stated that the quality of care in the private sector is not necessarily better than that of the public sector. There has to be a structural roadmap to improve access to primary health care at each of the 625,000 villages that we have in the country. A thrust in this direction will have to be the third pillar of the reform part.
• A road-mapped support structure for further expansion of the already-successful National Rural Livelihood Mission ( which funds collectives like Kudumbasree SHGs across India) and liberalised credit flow for small and marginal farmers including sharecroppers/lessee farmers, who are now out of the formal banking system would be a welcome step, especially given the sterling performance of the farm sector even in these Covid times.
What then can we expect of the size of the budget? In the last four years, the budget expenditure has witnessed an increase in total outlays by about Rs 3 lakh crore every year, starting with Rs 21 lakh crores in 2018 and reaching up to Rs 30 lakh crores in the estimates for 2020-21. We can expect the upcoming budget size to be around Rs 32/33 lakh crore if the CEA’s survey is any indication.
Though this year, the revenue collections will definitely be no match for the estimates, the higher Government borrowing of Rs 12 lakh crore against the estimated Rs 8 lakh crore is expected to ensure that Government expenditure is not curtailed.
The Prime Minister, Narendra Modi, has already stated that many mini-budgets have been presented this year and the Union Budget 21-22 should be seen as a continuum of these moves.
For sure, the Atma Nirbhar packages has accounted for additional outlays in food subsidy, the Rural Employment Guarantee programme and cash/commodity transfers during the lockdown period.
The Finance Minister can be expected to continue with an outlay of Rs 1 lakh crore for MNREGA (revised for 2020-21), Rs 75,000 crore for PM Kisan cash transfer, about Rs 1 lakh crore for road works and NHAI and Rs 75,000 crore for the Railways. Similarly, the budget for the Ministry of Health and Family Welfare should in all likelihood see a step-up to about Rs 1 lakh crore.
The main challenge will be on the front of the resource. There is neither any need nor any scope for giveaways on the taxation front. Already, salary earners are tax-exempt up to about Rs 7.5 lakh of income per annum. New companies in manufacturing were offered a tax rate of 15% in the last budget.
In a country where the tax to GDP is just about 10 per cent and a mere 3.5 crore individuals file tax returns, now is not the time to give any further relief. On the other hand, the Finance Minister cannot be faulted if she were to think in terms of a Covid Cess and a tax on the ultra-rich so that funding for some of the welfare schemes for the poor can be continued.
Still the fiscal deficit for this year as well as the next will be about 5-6 per cent of the GDP. Not a cause for worry. As the CEA strongly advocates, only economic recovery is the panacea to the Covid-induced dip in our national fortunes.
(The author is a top Indian bank executive who worked for four years in SBI, Singapore. Views are personal.)