With less than two weeks to go for the Union budget, expectations about Big Bang announcements have risen. Not least because Finance Minister has herself talked about wanting to see a “post-pandemic budget never seen before in a hundred years.” It is not clear what she actually meant by that, but it has given rise to hopes for another 1991 kind of breakthrough budget-cum-liberalisation package from the government.
Here are 10 big asks from the budget to be presented on 1 February, including the reasoning behind each one of them.
First, the budget has to abandon fiscal conservatism in the coming year. According to many reports, 2020-21 will probably report a very high fiscal deficit of around 7-7.5 per cent. The State Bank of India’s economic team estimates the figure at 7.4 per cent.
The primary objective in 2021-22 should be to retain this level so that there is fiscal space to make the investments needed to revive growth and fund the massive costs of vaccinating millions of vulnerable people in India so as to achieve herd immunity.
In this context, a Business Standard report claiming that the government may be aiming for a fiscal deficit target of 4 per cent by 2025-26 makes sense. It means the focus is rightly on growth, and not on presenting a pretty picture of fiscal consolidation.
Some fiscal fundamentalists will ask: what if inflation rages? The answer is simple: the vulnerable sections of society can and should be protected, and the headline retail inflation numbers can be managed through supply side and administrative measures on food and fuel, both of which are amenable to such management.
If, perchance, inflation rages above 6 per cent, one can even allow the rupee to rise against the dollar and bring it down. We have enough stocks of food and foreign exchange reserves, not to speak of leeway to cut petro-taxes, to manage all the three main components of non-core inflation.
Second, given the likelihood of large slippages in bad loans – the RBI says it could rise to as much as 13.5 per cent by September 2021 – the government must plan on providing for a larger dose of capital infusions into public sector banks. Even though public sector bank shares have risen fast in recent weeks, their ability to raise lots of capital from the markets cannot be assumed.
The creation of a bad bank to take away their excess load of bad debts, and a holding company for bank shares will help meet some of the challenges in raising capital, but government infusions are a must. More so if banks have to fund credit expansion next year.
This is another reason why the fiscal deficit target for 2021-22 should not be aggressive. It is always better to keep the target high and, if growth and revenues pick up during the year, The govt. can always announce a big improvement by the time the next budget is presented in February 2022, instead of doing the opposite: be too optimistic on targets, and then announce a slippage. Fiscal credibility is built by going one better on your promises, not by allowing your promises to remain a dead letter.
Third, the government must budget for large goods and services tax (GST) compensation numbers, especially the amounts due to be paid to states in this fiscal.
States need the fiscal space to invest in infrastructure, including health infrastructure and vaccines. Making them borrow too much with the promise of amortising this debt by continuing the GST cess beyond 2022 is not a great idea. The sooner we remove the cess and rationalise GST rates to a simple three-tier structure the better.
If a high central fiscal deficit allows for a faster rationalisation of GST, so much the better. Kicking the can down the road is not required for no one can be sure that another crisis will not meet us head-on in the next five years. A one-time and comprehensive fix for the GST structure, including a one-time clearance of all GST compensation dues, should be accommodated through a higher central fiscal deficit for 2021-22.
Fourth, given the backdrop of the Covid challenge, which India has actually handled pretty well, a massive and long-term increase in healthcare spends has to begin from 2021-22. India’s current public spends on healthcare add up to barely 1.29 per cent of GDP, though this would have shot up in 2020-21, when the numerator (health spending) would have gone up sharply and the denominator (GDP) has shrunk.
Post-pandemic, we should not only push public spends to 2.5 per cent of GDP, but gradually raise it to 4-5 per cent. The year in which this transition must begin is 2021-22.
Fifth, infrastructure clearly needs a big fillip, and this means not only roads and railways, but also ports, airports, telecom, healthcare, education, and social infrastructure. Defence, which has seen its share of spending stagnate and fall for many years, needs a big boost, and can be a key driver of Atmanirbhar Bharat in manufacturing.
Over the last decade, defence’s share of GDP has fallen from 2.5 per cent to 2.1 per cent, even though this trend would have temporarily reversed this year due to the GDP shrinkage and forced increase in defence spends due to the situation on the China border. Given massive defence needs over the next decade, India must push up spending to 3 per cent, perhaps by pencilling in an annual 0.2 per cent rise every year for the next five years.
The money can be raised through higher budgetary allocations and/or a non-lapsable cess on all taxes. Sales of large tracts of defence lands could help bridge the gap between required spends and available resources. Many defence properties are in big cities and there is a strong case for moving them out to new enclaves in the hinterland, where security can actually be better, even as costlier urban land can be sold for raising revenues.
Sixth, 2021-22 needs to be a big year for telecom expansion, especially through the auction of 5G spectrum. However, we need a big shift in how auctions are used to raise revenues in future.
Currently, spectrum is overpriced, and this has been a major reason why telcos are forced to raise tariffs frequently to keep their heads above water. There is a case for drastically lowering spectrum reserve prices, especially after the Supreme Court judgment defined “adjusted gross revenues (AGR)” so liberally as to bring in huge revenues for the government with retrospective effect.
The case for lower spectrum prices can be stronger now that AGR can be made to generate more. However, the best idea may be to lower all telecom spectrum costs, with government making up from income taxes what it may lose from lowering spectrum charges.
Seventh, the prime aim of agriculture policy over the next five years must be to reduce the number of farming households and suboptimal land holdings by incentivising small and marginal farmers to sell or lease their lands so that productivity can be raised. Indian agriculture cannot account for 15-16 per cent of GDP and support three times that number in terms of dependent population. The best was to double farmers’ incomes is by halving their numbers and getting the surplus hands to seek jobs in urban areas.
This process can be incentivised by the government making more cash payouts to small and marginal farmers, and devising financial products that assure them of annuity incomes against land they lease out or sell. An acre of farmland that sells for Rs 15 lakh, if invested in an annuity yielding 8 per cent per annum, can generate Rs 10,000 of monthly income per household.
Even if the interest rate needs a subvention from the government, it would be worth it to get small farmers out of farming. Farmland that is of lesser value may need a different kind of fiscal support, but clearly the end-goal must be obvious: get small and marginal farmers out of farming.
Eighth, a key part of revenue mobilisation in 2021-22 should be through privatisation, including sale of land and properties belonging to public sector entities. Bharat Petroleum, Concor, Air India, Shipping Corporation, and some of the banks should be sold, and so must a significant stake in Life Insurance Corporation.
Instead of just bringing private investment in coal and mineral mining, there is no reason why even Coal India or some of its subsidiaries with long-term mining leases should not be privatised, with government merely retaining a golden share to ensure that energy security and haphazard mining do not become the norm.
Ninth, with growth delinking from jobs in an era of massive infusions of capital and digital technology, significant sums must be invested to subsidise new job creation and elimination of a large chunk of social security costs – especially the employee’s contribution to provident fund and medical insurance.
Job creation needs a focus on incentivising sectors that are labour-intensive, lowering the cost to firms for taking on additional employees, and increasing the take-home salaries of new workers. This is the sustainable way to boost demand and jobs, which then feed into each other in a virtual cycle of growth and jobs.
Tenth, given the disproportionate impact Covid has had on various sectors, special pick-me-ups should be targeted at sectors that bore the brunt of the pandemic’s economic costs – like tourism, some kinds of services, etc. A broad-based demand stimulus is not required, but focused spends on sectors that generate a large number of jobs and where the economic devastation has been large is the need of the hour.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.