A budget in challenging times

By G N Bajpai

Designing, drafting and delivering an appreciable national budget is a challenging task in a noisy democracy with competing claims, competitive populism and an inter-dependent world where the flow of external resources significantly depends on perceptions often built around presumptive standards. This year the formidability of the Union Finance Minister’s challenges was compounded by the impact of Covid-19, never before (expected) GDP degrowth of over -7% and limited fiscal space. The first set of opinions on the quality and content of the budget have been splashed all over the media. The verdict of the capital market right up to the time of writing this column was positive and reverberating.

Referring to the budget and broader national priorities, first and foremost, there is the restoration of the growth trajectory. Secondly, employment generation. Third enhancing total factor productivity. Fourth, equity. Fifth cleaner environment, ecology and sustainability. And finally, fiscal prudence.

Every spectacular economic growth story around the world in modern history from the US, post-world war Europe to very recently China has been scripted on the plinth of infrastructure. Budget 21-22 accords unprecedented focus on building an entire gamut of physical and social infrastructure-roads, railways, ports, airports, power and health, housing, education, water supply and sanitation etc. The allocation of a higher amount of resources has been accompanied by a better policy response, improving institutional framework and concessions. The approach seems to be to facilitate execution, minimise political risk and ease the raising of financial resources from the market.  Lack of financial closure has been the graveyard of many good projects.

Building vibrancy in the debt market, setting up of a distressed assets institution, consolidation of security market laws and sharpening of the exit policy are all going to address the lending capacity inadequacy, enhancing of investor confidence and infrastructure building challenges. Further, infrastructure building revives and enhances the growth of a host of other sectors and businesses. It is understood that the building of roads influences more than 150 industries, so is the case with other infrastructure projects.

The manufacturing sector in India has been a laggard.  Even ‘Make in India’ launched by Modi government did not contribute significantly to revival. The policy framework including the Productivity Linked Incentive (PLI) scheme announced a few months earlier has been complemented in this budget with the setting up of seven new textile parks and a few other measures like the scrapping policy etc. In addition, there is a coordinated approach to bring down logistics costs. This should revive manufacturing.

The housing and construction sector has been in limbo for some time. There is some improvement after the settling down of the impact of RERA, economic recovery, a sharp decline in borrowing rates and added focus on public housing. Several steps including the one-person company will give a boost to the ecosystem in small towns leading to a large number of small units and start-ups sprouting.

Infrastructure building, invigoration of manufacturing, boost to start-ups and a pick-up in housing and construction all put together are likely to weave the story of a long-term higher growth trajectory. 

The focus on horticulture, animal husbandry, dairies and fisheries are going to supplement incomes in rural areas.

The biggest employers in India after agriculture are construction, health, housing, textiles and infrastructure building. Once these sectors shape up, employment opportunities will unfold and absorb a number of job seekers entering the job market every year. Looking forward, research and development will be supported with the setting up of the Research and Development Fund that has a corpus of fifty thousand crores to be funded in the next five years.

The focus on horticulture, animal husbandry, dairies and fisheries are going to supplement incomes in rural areas. These along with better employment opportunities for the rural and urban unemployed will address albeit marginally the growing inequality. But much more needs to be done and urgently.

Improved quality of education, skill developments, health, housing and sanitation will not only enhance the quality of life but also productivity of labour. All these along with attention to clean energy will also enhance wellbeing and sustainability.

The envisaged policy frame of improving the ease of doing business aims at promoting entrepreneurship, competitiveness and trust. This will strengthen the enthusiasm of not only Indian but global entrepreneurs and enhance the eligibility to join the global value chain. And with a large consumption market India could become a preferred destination for diversification.

The government proposes to raise a significant size of resources through monetisation of assets-PSU, gas pipelines, power transmission lines, land etc., including through new approaches like Infra-invest REITS and strategic disinvestments. The government is proposing to contract its role in business and focus on governance by stepping out of areas other than few specified strategic sectors like defence, aerospace, energy, banking and insurance. The idea is to replace existing assets with new assets creation without straining the fiscal space. Eventually, it will enhance the productivity of capital.

The budget envisages a fiscal deficit of 6.8% with a path for restoring the FRBM compliance by 2026. The heartening features are improved quality of spending, greater transparency and reduction, if not elimination of off-budget funding. Government has refrained from raising either direct or indirect taxes so as to ensure that neither the sentiment nor available resources with private sector entities or individuals are impacted adversely. On the face of it, fiscal prudence has been sacrificed, but the option of either not spending or raising taxes was going to be more damaging. Globally, the modern monetary theory is being flaunted to rationalise a high fiscal deficit. With a declared glide path India should hopefully receive forbearance including from global rating agencies. However, the proposed bridging of the gap via market borrowing does ingrain the risks of a rise in interest rates and inflation.

The Finance Minister has ticked all the boxes except splurging direct cash and tax reductions. The direct cash transfers do have the potential of boosting consumption in the immediate future. But with limited fiscal space, she had to make a choice between now or making an environment of high job creation and growth. In fact, the proposed allocation is also going to boost consumption but with a lag. There are some expectations, which have not been met.

In addition to the interest rate risk, inflation and a temporary blip in consumption, the greater risk is of execution. The FM has accepted in her speech that some of the last year’s announcements were yet to fructify. The bureaucratic blocks will have to be substantially strengthened, if the boons of the budget are to be reaped in full measure.

(The writer is a former Chairman of SEBI & LIC)