How to make Budget 2021 a truly path-breaking budget
Finance minister Nirmala Sitharaman recently promised to present a ‘never before’ Union budget. While we have to wait until February 1 to find out if she indeed does so, we know that the circumstances this budget is arriving in are truly never-before and not seen in the past four decades. There have been only four instances when budgets have been presented in times of negative growth — 1958-59, 1966-67, 1973-74 and 1980-81.
When the finance minister presented her previous budget on February 1, 2020, India’s economy had already been decelerating, growing at just 4.1 per cent. This year, the double whammy of Covid-19 and the nationwide lockdown means the economy is projected to contract by 7.7 per cent.
The Union budget, which lists the government’s spending priorities in the financial year, will be more closely watched than in preceding years because it will, hopefully, chart the way for us to climb out of the deep chasm we are in and get back to where we were before the pandemic.
Given these unusual circumstances, we advanced our usual post-budget coverage to make sense of the high expectations. Budget 2021-22 arrives at a time of great constraints. Revenues are down, expenditure is rising. Three growth engines—private consumption, private expenditure and exports—are sputtering. The fourth and only functional engine, government expenditure, has been pumping hard. The government has already announced a stimulus of Rs 29.87 lakh crore, amounting to 15 per cent of India’s GDP, including Rs 8 lakh crore of RBI intervention to boost money flow. It cannot make cuts in the other five big heads—interest on loans, defence, food subsidies, pensions and transfers to states—which constitute over 60 per cent of the budget. They are either politically unpalatable or statutory obligations. Particularly defence, given the massive Chinese mobilisation in eastern Ladakh.
Our cross-sectoral analysis of the economy’s bellwethers—automobiles, real estate, banking, manufacturing— inspired the theme for our cover story this week. ‘Time for Big Spending’, written by Executive Editor MG Arun and Deputy Editor Shwweta Punj, looks at why the government needs to open the tap fully when it comes to spending its way out of the present crisis. To see why this could work, it may be instructive to look at what the 2009 budget taught us. After the 2008 global economic crisis, the budget hiked the fiscal deficit from 2.5 per cent of the GDP to 6 per cent and announced a Rs 1.86 lakh crore spending stimulus, then 6.5 per cent of the GDP, to bring the economy back on track. The Board of India Today Economists (BITE) we consulted mostly recommended the 2009 formula. They say that the government needs to increase the fiscal deficit to between 5 and 7 per cent of the GDP.
The experts identified three areas where the government needs to focus its expenditure on. Health, of course, needs to be the number one priority. The government needs to hike its health spending from the current 1.5 per cent of the GDP to at least 2.5 per cent to strengthen its medical infrastructure so that it can handle any fresh wave of the pandemic. Infrastructure is another big force multiplier that can stimulate the economy. The government needs to restart its National Infrastructure Project (NIP) to spend Rs 111 lakh crore on 7,300 projects until 2025 and pay its pending bills. Urban unemployment, which increased to 8 per cent in December, is a far greater challenge than is publicly known. Several of our experts suggest an urban version of MNREGA or the Mahatma Gandhi National Rural Employment Guarantee Act to provide jobs and social security. However, others ask whether this will encourage job-seekers in rural areas to look for jobs in cities without the necessary skills and add to the already creaky urban infrastructure. There are no easy solutions to solving the unemployment problem except to have rapid economic growth.
Where can the government raise the money for all of this? Raising Rs 25 lakh crore each year for the NIP, for instance, is going to be a monumental task. Our experts suggest the monetisation of government-owned assets in defence and non-defence sectors, which can be massive if done aggressively and methodically. Also, the disinvestment of public sector undertakings (PSUs), for which the government had set a target of Rs 2.14 lakh crore in 2020-21, achieved only a measly Rs 11,006 crore. The stock market is at an all-time high, and there is enough liquidity in the market. Closing money-draining PSUs saves money for the exchequer. The government also needs to review the ballooning cost of the salaries of central government civilian employees, which currently stands at Rs 10 lakh crore (both central and state government employees put together, in 2017). Perhaps, dispensing with some ministries that have long outlived their utility could be a start. If we are to accelerate our infrastructure investment, we need a robust bond market to attract foreign investment.
Budget-making, even in normal circumstances, is an arduous task, given that it requires balancing the needs of multiple ministries and demands of the various sectors of the economy. Being the country’s finance minister, especially when the economy is under unprecedented stress, has to be the most unenviable job right now. If she has to live up to her promise of a path-breaking budget, the FM will have to shed all old shibboleths and compulsions. This could be a great opportunity to cut tax rates and accelerate demand and consumption. She must think out of the box and with the audacity to energise the economy and put it on the path of high growth, which it richly deserves. It is now or never.
(India Today Editor-in-Chief's note for the cover story, Time for Big Spending, for January 25, 2021)