Despite some hits, the Budget has crucial misses

The Budget, at its simplest, is the government’s tentative income and expenditure statement. Like all financial statements, the devil lies in the fine print. At its broadest, the Budget is a pious statement of the government’s policy and ideological intentions. It is also the government’s statement of how it seeks to tackle the immediate political (electoral) and economic challenges. Hence, any quick assessment of the Budget has to be preliminary. So how is the Budget likely to affect the lives of citizens immediately, and economic aggregates such as investment, output, employment and income distribution in the medium term?

India’s meagre response

Domestic output or GDP, net of inflation, is expected to decline by 7.7% in the current financial year (FY2020-21), compared to the previous year (FY2019-20). The decline in per capita income is by 8.7%. The contraction is one of the worst among the world’s major countries. The novel coronavirus pandemic and the resultant lockdown led to massive job and livelihood losses. Unlike most advanced countries and emerging market economies, India’s response to address the distress of the masses has been meagre. The government’s additional public spending to cope with the unprecedented crisis has been a little over 1% of GDP. As is widely known, the output (GDP) contraction in 2020-21 has come on top of a slowdown in GDP growth over much of the previous decade (the 2010s), fall in employment, the decline in real wages, rise in the number of people in poverty, and, hence, an expected rise in the proportion of undernourished children. Much of the decline in the growth rate is on account of an unprecedented fall in fixed investment rate as a ratio of GDP, especially in infrastructure sectors.

Capital expenditure proposal

Given the context, the present Budget’s focus on stepping up public investment by 34.5% in the coming fiscal year (compared to the current year) is a welcome sign. The Finance Minister’s speech said the government will borrow an additional ₹80,000 crore for the purpose in the next two months. The estimated fiscal deficit for FY2021-22 is 6.8% of GDP for the central government. And States are allowed a higher fiscal deficit, if the expenditure is on capital investment.

These figures certainly look impressive. Realisation of these investments would crucially depend on tax revenue realisations, disinvestment proceeds, sale of rail and road assets and the government’s ability to raise resources from the market, without raising interest rates for the private sector. There is no mention of the government’s recourse to debt monetisation. While the investment intentions are evident, its financing efforts seem to have too many loose ends.

The proposed Development Finance Institution (DFI) is also welcome. One of the reasons for poor industrial and infrastructure investment during the last decade was a lack of long-term credit for infrastructure, which by definition yields low rates of return spread over a long period of time. Commercial banks, whose deposits are for short to medium term, find it difficult to lend for long term (more than five years) for the fear of maturity mismatch. Moreover, as banks were laden with rising non-performing assets on account of poor corporate sector performance during the last decade, their ability to make fresh loans was adversely affected. Further, contemporary experience shows that most successful industrialising economies have relied on DFIs for providing long-term credit (https://bit.ly/3j5cqVs).

While the renewal of the idea of DFI is welcome, many caveats are in order. Its Achilles heel is in securing stable long-term, low cost sources of finance. The Finance Minister’s speech mentioned that the proposed DFI will be financed by foreign portfolio investments (FPI), which is a cause for concern. By definition, FPI represents short term inflows with exchange rate risks, while infrastructure investment is for long term whose revenues will be mostly in rupees. Such an investment will inevitably lead to currency and maturity miss-match, raising cost of capital. Hence, there is a need to consider alternative long-term sources, preferably from domestic sources, or international development agencies.

Health and employment

The first of the “6 pillars” that the Finance Minister described in her speech deals with health infrastructure — rightly so. If the announcement made represents a substantial annual fixed investment in improving urban sanitation, drinking water and sewage facilities, it is indeed a welcome step. There are lessons to be learnt from rural Swachh Bharat Abhiyan, however. As the recent National Family Health Survey data for 2019-20 for select States showed, just constructing toilets in household premises is of little use without adequate access to water and sewage facilities, which are public goods in nature (best provided by local governments). Unless these complementary facilities are constructed in a coordinated manner, the effectiveness of such investments would be minimal.

The Budget has very little to say about employment. Surely, the proposed step-up in infrastructure would create labour demand. It bears repetition that the 2010s were a decade of job loss growth, as in official National Sample survey estimates. The pandemic has rubbed salt into the country’s wound, leading to the migration crisis, which is still with us (as the report cited above shows). Unfortunately, there is very little acknowledgement and response to the crisis in the Budget.

Inequality glossed over

There is no mention of the stupendous rise in economic inequality during just the last year. While the poor lost their jobs and livelihoods in 2020, corporate India’s profits zoomed. The rank of the richest Indian is at the 12th spot on the Bloomberg Billionaires Index. Why could not the Budget consider a special tax on the super-rich — as many countries are now mooting? The Budget does not seem to reckon with such a rise in inequality, let alone seek to redress it.

In summary, if the capital expenditure plan outlined in the Budget speech is credible, and implemented with assured financial backing, it could revive the investment cycle. The proposed development bank for term lending for infrastructure is welcome, provided its sources of finance are cheap, long term and mostly domestic. Investments in urban public health infrastructure — sanitation, water supply and sewage — are in the right direction if implemented in a coordinated manner.

That there is no targeted employment programme to alleviate the immediate crisis is a matter of concern. Government apathy towards those who lost jobs and livelihoods due to the health and economic shocks last year seems galling.

R. Nagaraj is with the Centre for Development Studies, Thiruvanathapuram, Kerala