Finance minister Nirmala Sitharaman has promised a budget like no other to make India a leader of growth in the world. The statement has raised high hopes, but can she live up to these hopes?
A big advantage is that she need not worry about growth in the coming year. Gross domestic product (GDP) is projected to contract by 7.7% in the current year, and if next year it only goes back to its 2019-20 level, it will mean growth of about 8%. Her real challenge is to ensure robust growth from 2022-23 onwards. The economy grew by only 4.2% in the year before the pandemic and going back to this level will be unacceptable. It will not generate enough jobs of the kind in demand. The budget should therefore be judged by whether it will get the economy back to 7% plus growth from 2022-23 onwards. This requires two things: a macroeconomic environment conducive to growth and reforms in critical areas that would increase efficiency and stimulate investment. Here is my wish list of how she could address these issues.
What economists usually mean by a “conducive macro economic environment is a “ modest fiscal deficit. The finance minister faces a major problem because the fiscal situation has gone completely haywire because of the pandemic. The deficit was originally targeted at 3.5% of GDP but it is likely to be 7.5-8%, including off-budget items . Since the states’ deficit will also increase to around 5%, the combined deficit in 2020-21 would be around 13% or so, much higher than at any other time.
We are clearly way off the Fiscal Responsibility and Budget Management Act glide path. The finance minister would gain credibility by acknowledging this up front and revealing the full size of the fiscal deficit, off-budget expenditures included. She could credibly argue that the revenue collapse made a higher deficit unavoidable because it would have been wrong to cut expenditure at a time when private consumption had fallen and investment was also weak.
Although revenues can bounce back in 2021-22, a significant reduction in the fiscal deficit may not be feasible, given the heavy expenditure commitments to launch a credible vaccination programme, provide income support to the poorest who have been hit hard because of a K-shaped recovery ( e.g. via MGNREGA) , recapitalize banks to deal with non-performing assets, and raise defence expenditure to reflect the geopolitical situation we face. We can perhaps hope for a reduction in the Centre’s deficit by about 1 percentage point of GDP in 2021-22, with a credible game plan for a further reduction of 3 percentage points over the subsequent two years. In the longer term, it is the adoption of reforms promoting high growth that will achieve fiscal consolidation because both revenues and GDP will grow faster.
India’s tax ratio is much lower than it should be, given our level of development, and raising it is critical for fiscal consolidation. This calls for deep tax reforms, including of tax administration. This is best done by setting up an expert group that includes economists, tax lawyers, accountants who work with the private sector and are familiar with commonly-faced tax problems. The Chelliah Committee did precisely that in 1991, and it is time to repeat the experiment.
Fixing the goods and services tax (GST), though, can be done right away. Its introduction was an excellent reform, but experts agree that the way it has been implemented has reduced its revenue-raising power. To remedy this, goods currently excluded should be included, and several rates reduced. We should have a small list of exempt goods, a general rate of say 14% or 15%, and a small list of final goods consumed by upper-income consumers with a rate of, say, 24%. Today’s top rate of 28% is too high and applies to many intermediate goods. These changes cannot be done in the budget because that power lies with the GST Council. However, the finance minister could announce in her speech that she intends to put such a proposal forth to the Council. Given the political strength of the government and the large number of Bharatiya Janata Party states, it should be possible to get this done.
Bringing the banking sector back to health is essential to ensure a healthy recovery in 2021-22 and beyond. The following six steps would make a big difference. (a) Give the RBI the same powers over public sector banks (PSBs) that it has over private sector banks thus empowering and incentivising it to be more proactive in supervising them. (b) Declare that there will be no further postponement of the insolvency process under the IBC. (c) Set up a government owned “bad bank” that would take up the stressed assets of PSBs and concentrate on recovery. (d) Privatize a few PSBs by bringing in strategic partners from the private sector (e) Implement the Nayak Committee recommendations for putting government equity holdings in PSBs into a separate professionally-managed holding company and let each bank be board-managed. (f) Establish a new development finance bank to provide long-term loans for core infrastructure development with the government having a minority ownership of 24%, with other investors including sovereign wealth funds contributing capital and having a say in management.
A new policy for privatizing public sector companies has been talked about. The budget could be used to announce the companies to be privatized no later than the end of the third quarter of the financial year. This would create credibility.
Spinning the Railways off as an independent public sector corporation would be a major reform. China did this more than ten years ago. It would give the Railways more flexibility to raise market funds and engage in public private partnerships. Workers who prefer to remain government employees could be allowed to, but all new recruitment should be by the corporation.
Finally, the budget could clarify the scale and form of the covid vaccination programme. The central government has said it will fully cover the cost of the first 30 million healthcare and frontline workers. There is a strong case for the centre covering the entire cost of the public sector programme. The financial burden could be reduced by opening up a parallel private-sector channel for vaccination by private hospitals and other authorized agencies charging a fee for the service. Those who prefer the free public-sector vaccination could register for it, but others could be given the option of paying.
The above proposals are not new, and nor are they exhaustive. However, taken together, they would send a strong commitment to reforms aimed at accelerating growth.
Montek Singh Ahluwalia is former deputy chairman, Planning Commission