A growth blueprint in times of a pandemic

 "I want to see a post-pandemic budget never seen before in 100 years," Nirmala Sitharaman, India’s Finance Minister, confidently and boldly stated on 18^th December 2020 at an industry association conference. What might we, the people of India, expect to see in such a Budget?

The uniqueness of this FY22 Budget is, of course, both in the context of the once in a century public health crisis and consequently in the very process of the Budget preparation itself, forcing routine physical interactions to digital modes. Since most of the background data analysis and collation will have been done in virtual mode, with limited physical interactions between the various government departments, this in itself is an enormously complex coordination exercise. And a significant achievement.  

As to the content, this is the culmination of a year of escalating policy responses whereby the Government responded, with RBI support, and a “Survive, Revive and Thrive” strategy, to the COVID induced crisis.

Given the scarring in a large section of households’ income and earning ability, the required boost in consumption demand will have to originate from government spending.

India’s 2020-21 GDP is officially estimated to be 7.7% lower than the previous year, the result of the stringent lockdown, although we expect that the ongoing signs of a faster than expected recovery in many sectors will mean that the contraction might be less, in the range of 6-7%. The truth is the pandemic will have permanently cost India a large amount of output and income. The Budget is an opportunity to regain some of this loss.

The first priority will be to raise revenues for the government, since the government will be the main enabler of higher expenditure. Given the scarring in a large section of households’ income and earning ability, the required boost in consumption demand will have to originate from government spending. The overall collections will be helped by a significant increase in the nominal GDP growth, which is likely to be projected in the 14 – 16% range. Some tax revenues, like fuel cess, will have significant buoyancy, given the expected increase in transport and freight traffic, but growth in the other streams is likely to have a more limited upside. Some tax rates will probably have to be increased, but should be concentrated within a small section of the highest income earners, and preferably be temporary cess and surcharges, levied only for a couple of years till household incomes stabilise. 

The bulk of the required revenues, however, will have to come from the disinvestment of government companies and establishments. The big-ticket sales of stakes in marquee companies (some already announced like BPCL, LIC and Air India) will need to be speeded up. The government also owns physical and financial assets – whose cost value was over Rs 15 lakh crores a few years ago, now worth much more – which can be monetised, both to earn revenue and increase efficiency in the operations of these assets. These include land, roads, waterways and much more. For instance, the Railways have been trying innovative models to increase private sector participation and investment in the stations, more coaches on the tracks and so on. Current high valuations in stock markets will also help in garnering handsome returns.

The Budget, however, is much more than just a statement of taxes and spending. The pandemic has sharply accelerated economic, technology and financial trends which are likely to increase inequality and a concentration of incomes. One point of continuity from earlier Budgets will be an accelerated focus on the social sector, particularly the farming and the rural community. In addition, a holistic perspective on spending on healthcare and medicine, vaccination, education – especially higher education and vocational training – water and sanitation, etc. can help deepen initiatives to increase the access of the disadvantaged to economic opportunities.

As part of a broader shift in the strategy of support to economically weaker, lower income segments, there is likely to be a shift in the delivery of subsidies away from the current channels of food and fertiliser subsidies to a Direct Benefit Transfer based amounts to the bank accounts of beneficiaries which can reduce leakages.

The Budget is also likely to widen the coverage of insurance schemes – from the existing medical and accident insurance – to widen the scope of social security nets for vulnerable segments of society. Given the expected gradual and slow recovery in employment opportunities well into FY22, this will be a key support for the revival phase of the stimulus strategy. More broadly, there has to be a laser like focus on policies to retrain workers in the changing jobs environment.

The fiscal and reform measures of the Budget will have to be synced with multiple monetary, credit, insurance, market, trade and industry policies in order to maximise the collective impact for growth. The Budget will continue with measures to boost loan flows, including re-capitalisation of Public Sector Banks, further measures to develop corporate bond markets and facilitating access to cheaper foreign capital.  One widely expected step is an announcement of a “bad bank”, into which the existing bad loans of the banking sector can be transferred. A much more radical step will be a Financial Holding Company for Public Sector Banks, which will remove their constraints in raising capital by divesting governments’ holdings below the statutory 51% floor.

A second initiative will be the increased use of credit guarantees to enhance fund flows to stressed sectors. The emergency ECLGS scheme for incremental loans to MSMEs has been beneficial in helping them tide over the cash flow loss during the lockdowns, and this scope might be further extended and deepened for small businesses, and thereafter to other segments and sectors, prominently, agriculture and farm loans. Well-designed credit guarantees can minimise direct fiscal spends while ensuring a significant flow of prudent loans to borrowers.

The Budget pulpit should be used to provide a vision of India’s development strategy for the next half decade and beyond, accelerating the initiatives under the umbrella of “Atmanirbhar Bharat”. Increased capital expenditure is needed to enhance India’s productivity and growth potential. Hence a fiscally strapped Budget will have to attract private sector investment which will be critical in healthcare and education.

The Budget will have to juggle growth stimulus with higher spends and deficits.  Increased efficiencies in the delivery of services can leverage the capabilities of India’s world class digital infrastructure.

Expansion of the Production Linked Incentives (PLI) programme that encourages “Make in India” manufacturing will be part of the broader efforts to attract global supply chains which are looking to set up alternative manufacturing locations outside of China. India remains an attractive investment destination; large Foreign Direct Investments (FDI) flows have already come in for retail distribution, mobile phone and telecom equipment manufacturing, etc. The scope of investment in other sectors needs to be incentivised through investment-linked credit and lower taxes.

So many things to be done! Balancing the multiple trade-offs given limited resources to ensure the biggest bang for the buck will require decisions to be data driven. One of the major opportunities to have emerged is the rapid digitalisation, and explosion of data. Increased efficiencies in the delivery of services can leverage the capabilities of India’s world class digital infrastructure. Availability of well-designed dashboards – even for public use – will be an important channel to communicate the resolve for outcome-based monitoring of key programmes highlighted in the Budget.

In brief, the opportunity for the FY22 Budget to be one “never seen before in 100 years” is striking. The Budget will have to juggle growth stimulus with higher spends and deficits. This will be an opportunity to implement the promise of “Minimum Government, Maximum Governance”.

(Saugata Bhattacharya is Executive Vice President and Chief Economist of Axis Bank) (Views are personal)