Newsrooms and budgets have a complicated relationship where the urgency of the present often has to confront the almost mundane chore of going through the same drill every year. Given the fact that Union finance minister Nirmala Sitharaman will be presenting her ninth consecutive budget today, even she is likely to feel these contradictory emotions.
India, especially under the current government, has established its credentials as a predictable and conservative machine, as far as fiscal responsibility is concerned. This rules out any nasty surprises in the budget for markets, especially bonds. It also means what many analysts have already pointed out: The budget will likely continue on the path of fiscal consolidation, which would entail no large populist spending or big capital-expenditure push to the economy. The latter peaked a couple of years ago.
This does not mean that the budget will not have interesting or important numbers. The nominal growth assumption, for example, will be keenly watched in the aftermath of this year’s number being just 8%. Nominal GDP, after all, serves as the base for revenue projections and, therefore, the entire budgetary math. Similarly, it will be interesting to watch out for the assumed tax buoyancy — increase in taxes per unit growth in GDP — in the budget given last year’s income tax and GST reductions and the probability of large-scale reform in customs duty regime leading to some revenue loss. What also makes this budget more than an annual ritual is the fact that it will be the first year of the fiscal federalism framework under the 16th Finance Commission award. Any significant changes in the share of states in central taxes or financing arrangements of centrally sponsored schemes, if they are made, have the potential of changing the Centre-state fiscal dynamics.
All of these things are important in their own regard. But none of them can be described as the most pressing question as far as the medium- to long-term fortunes of the Indian economy is concerned. This is best described as follows. The Indian economy seems to have settled in a trajectory which has been giving a headline growth rate in the ballpark of around 6.5% — to be sure, the Economic Survey now sees potential growth rate at 7% — and where most of the growth, and perhaps revenue, comes from a small minority which is well off and has been reaping the tailwinds of the formal and globally integrated parts of the economy. The (revenue) fruits of this growth have been used to offer myriad and growing palliatives to a much larger cohort of have-nots to ensure political stability and prevent destitution. This bargain, while symptomatic of India’s larger democratic dialectics, is threatening to make economic policy an exercise in short-term political management rather than long-term national economic revival. The latter will take a resurrection of what economists like to call animal spirits, where investment is made on the expectation of future demand and it triggers a virtuous cycle where more investment and demand and, therefore, growth follow.
The usual refrain, as far as resurrecting animal spirits is concerned, is that of reforms. This government has undertaken many of them. From the rollout of a uniform indirect tax regime (GST) in 2017 to reducing corporation taxes in 2019 in the hope that it would nudge businesses to invest more to various incentives to promote domestic manufacturing, especially post-pandemic, and a middle-class consumption boost via first the new tax regime in income taxes (it offers higher disposable incomes if one does not claim savings based deductions) and then a large revision of tax slabs last year that boosted disposable incomes, and finally a reduction in GST rates and the roll-out of labour codes in the current fiscal year, the list is impressive. The outcome could have been better. Most institutional forecasts for next year’s economic growth are largely in the 6.5% ballpark (Survey has put it at 6.8%-7.2%) — which means it is business as usual. One theory puts the blame for this on businesses — and it isn’t entirely wrong.
But critics of this theory claim most reforms have focused on supply side issues rather than demand side. In Keynesian parlance, this is tantamount to putting the cart before the horse. Unless businesses see future demand, they will not invest, no matter what the incentives are. This requires broadening and deepening the aggregate demand base. This writer agrees with the spirit of the argument.
There are others who often argue that the government should try and tackle the demand problem by pushing the envelope on welfare payments. One can always engage with the argument on specificities — adding pulses to the food security programme would be a good idea, for example — but accepting this argument at face value entails falling for a logic of the tail wagging the dog. The Indian economy is too big to be structurally impacted by fiscal stimulus of say even a couple of percentage points of GDP, which would send financial markets into a frenzy.
All this leads to an interesting political-economy problem for an economic policy exercise such as the budget. Can the budget reinvent reforms in a way that makes it an organic driver of growth rather than something that provides one-off boosts or makes unrealised promises? Essentially, this would require changing things that are systemic hurdles to animal spirits. To be fair to the government, there are very few low-hanging fruits left here.
India, today, is far more deregulated than it was in the pre-reform era and plugged into harvesting growth drivers, which were hitherto untapped. The 1991 budget’s announcement of industrial deregulation and Yashwant Sinha’s 1999 budget offering income tax rebates on housing loans were such game-changing moments.
Let’s end with an argument which some people might find unnecessarily provocative. Most of the economic commentary in India talks about reforms with the pre-1991 period in mind. While it is always possible to find evidence to support such a line of thinking, it ends up getting blindsided to the structural changes in the Indian economy that have happened in the post-reform era. It is in these post-reform fault lines that we are more likely to see patterns which can unlock a long-term growth path for the Indian economy. The crux of this problem lies in aligning our comparative factor endowment advantage and entrepreneurial incentive to pump-prime labour-intensive manufacturing, which can achieve the twin tasks of pushing exports as well as import substitution.
To light another fire in lieu of a conclusion, how about the budget asking each state to throw the kitchen sink at one particular labour-intensive industrial cluster in return for clearly earmarked fiscal incentives rather than all of them claiming to be doing aspirational (but largely for optics) things such as Artificial Intelligence, which are best left to a coordinated central government strategy? After all, in reality, all states are only making cash transfers to win elections without making a decisive contribution to boosting long-term growth.
The views expressed are personal
