The government has officially sounded the bugle on the retreat of the pandemic. Hemmed into a cage of relief packages and income support over the last two years, it is now trying to break free and train its sights on the bigger goal of sustainable economic growth through investments in infrastructure. In doing this, it seems happy to live with a modestly loose fiscal setup and not give in to clamours of more welfare spending, even in an important election year. Bold, yes, but not without risks.
The first hint of such risks was flagged by the bond market on the day of the Budget, as yields rose in response to the government’s larger than expected borrowing calendar. An expansionary Budget in a rising inflation scenario when the country’s central bank is plotting an exit from a long spell of accommodative monetary policy, could be tricky. The RBI, though it may not admit so, must have watched the Budget with growing concern.
Some easing of the heightened relief measures of the year gone by was expected but a complete eschewing of demand side measures is a bit surprising, particularly as it is quite apparent that the scarring at the bottom end of the economic pyramid remains persistent and painful. The informal sector, services and MSMEs are still reeling but looking at the Budget, one may be led to believe that those problems are already behind us. Far from. Thus, a supply plus demand side budget may have been more appropriate than this either-or trade off. But that leads us back to the tricky question of fiscal space, and it is here that the budget betrays some timidity.
Tax revenues in the current year have been bountiful, way beyond what was budgeted at the start of the year. This then was the opportunity for the Finance Minister to push for the double-barreled approach – tax revenues plus strong capital receipts from asset sales and privatisation. One takes care of the capex thrust, the other the problem of low incomes and joblessness. Sadly, the second plank is missing and therefore we are left with this medium-term growth plan in the hope that it will eventually generate jobs and address the income problem. This too would have been a fair wager, were it not for the government’s spotty record on execution, particularly the states, where, more often than not, outlays don’t necessarily translate into outcomes. This issue becomes even more germane on realising that at least half of the additional spend on capex this year is through loans to states, where execution is already a problem.
The government’s grand Rs 6 lakh crore asset monetisation plan didn’t even find mention in the Budget and the disinvestment target for the coming year was set at a paltry Rs 65,000 crores. Clearly, there are issues with the valuation of the LIC IPO and question marks over whether there are enough takers for BPCL and the two public sector banks. This is disappointing as these non-tax revenues would have come in so handy in extending income support to the affected informal sector, further boosting the capex growth push or if nothing, to cool bond yields by expediting the journey to a 4.5 per cent fiscal deficit. The government’s body language on privatisation is worrying. One can only hope that it is on account of its poor track record over the last three years and not an admission of defeat in the face of forces fundamentally opposed to the very idea. That would be unfortunate.
The good news is that all of this, once the excitement of the day has faded, affects India’s prospects only on the margin. Looking at the fine print of this ‘enhanced’ capex spending, it appears unlikely it will crowd in the private sector into a virtuous capex cycle. Nice thought, but reality is somewhat different. Private sector capex, far more important than government infrastructure spending, has its own triggers – higher capacity utilisation, confidence in a durable profit cycle and enabling factors such as low tax rates and cleaned-up balance sheets, already in place. Slowly, but surely, and no special thanks to this Budget, we will get there. On the margin, the government’s efforts are welcome. No more, no less. Where it could, and probably should, have played a more meaningful role was to address the pain in the informal sector which the private sector, or market forces, will not address. India’s big problems in the near term, not necessarily in that order, are unemployment, inflation and inequality. On the first, the Budget may have done something to help through its infrastructure thrust, while on the second it may have made it worse. It is on the last aspect where it comes a cropper, as the gap continues to grow, ever higher.
Coming, as it does, bang in the middle of election season, this Budget probably reflects one of two convictions held by the Prime Minister. Either a firm belief that handouts don’t buy votes any longer, it is the more persistent and frustrating issue of joblessness that needs to be addressed to prevent alienation of the young electorate. Or that he needs to return to his original plan of a rightward slant to economic policy, sacrificing the distinctly leftist undertones of recent years, in the hope that other, non-economic factors will prevent any erosion of his voter base at the bottom of the pyramid. In that he may be right, though he did shed some young crypto traders from his fan base this Budget day.