To jumpstart the country’s post-pandemic economic revival, this budget was required to be precise and have immediate actionable measures to promote growth in a fair, equitable and timely manner. It also required spearhead and follow-through on the three essential themes highlighted in the previous year’s budget: Aspirational India, which promises a better standard of living for all sections of society; Economic Development for all; and finally, a Caring Society, with a focus on humane and compassionate social reforms.
Prof Atul Sarma, Visiting Professor, Institute for Studies in Industrial Development, New Delhi, shared that this budget is being presented in a very difficult situation with a unique burden of expectation to put India back on its recovery path, following a deep recession induced by the Covid-19 pandemic while managing an unenviable fiscal deficit.
Budget 2021 and Economic Reforms 2.0 towards New India was highlighted by Dr Dhiraj Nayyar, Director, Economics and Policy, Vedanta, OSD and Head, Economics, Finance and Trade with NITI Aayog, in a talk organised by the Impact And Policy Research Institute (IMPRI), New Delhi.
In one context, Dr Dhiraj Nayyar said that the budget was presented in a unique backdrop of a sharper slowdown, resulting in 7-8% of contraction for the year resulting in a significant loss. He shared it is important to realise that it will take some time to regain a normal state. Focusing on the brighter side, he says that this challenging situation has given us a canvas of opportunities.
Talking about the economic slowdown before the Covid-19 outbreak, he says that India’s GDP growth fell continuously for eight quarters from 8.2% in March 2018 to 3.1% in March 2020 due to stagnation in private investments. Private investments as a part of GDP are budging at 28-29% since 2011, compared to 36% in 2003-2008. China and East Asian countries, which have grown economically, had private investments as 40% of their GDP.
The second major engine of growth — i.e. exports, which have not been promising even before Covid-19 outbreak — was at a stagnant level for the past 4-5 years without any significant economic growth due to the disruptions experienced by Global Trade Policy caused by unilateral and arbitrary actions.
However, India’s global trade share is pretty low, being 1.75% , but it can be uplifted through exports if India is competitive enough. Failure in raising exports is due to some fundamental weakness in the economy predictor. “Fundamentally, 29% of the GDP ratio in private investments is not enough to sustain 8-10% GDP growth,” said Dr Nayyar.
Setting a twin context of Covid-19’s impact and economic slowdown, he says that the Budget 2021 had to address both the challenges of shock posed by Covid, which was unprecedented, as well as other challenge of bringing India back to a higher and sustainable growth trajectory. “For India to become a higher middle-income growth country, we need to grow at 8-10% in terms of GDP for 20 years at least,” said Dr Nayyar.
Talking about the GDP share in GDP, he mentioned that the government funding is one of the smallest components capturing only 14-15% of the GDP. Thus, the government’s size will always be limited, and one must be realistic about how much the government can do to lift the entire economy.
“The government role is more in enabling in framework both microeconomic and structural and less in terms of actually raising GDP,” said Dr Nayyar.
This was one of the important aspects, given the Covid-19 backdrop and the sharp fall of growth, and the government seemed to have finally abandoned its fiscal conservatives. The observation during the peak period of Covid-19 was that the government relied mostly on liquidity and monetary measures to support the economy and vulnerable sections. The government was more limited to fiscal stimulus in terms of fiscal outgrowth.
However, there was a certain amount of cash transfers to the poor section, but by-and-large, India’s fiscal stimulus was relatively small in terms of outgo compared to other countries. “The government is finally in favour of stimulus and this budget has come out where it can be fiscally liberal, but still needs considerable financial support to get economy back at track,” said Dr Nayyar.
There has been an increase in capital expenditure from 1.6% of the GDP in FY20 to 2.3% in FY21 Revised Estimates (RE) and further to 2.5% of the GDP in FY22 Budget Estimates (BE). However, its context is important because if we look at capital expenditure, the amount committed is about Rs 5 lakh crore, whereas the total government spending is Rs 35 lakh crore. Therefore, this stimulus remains a small amount of total government funding. “Any increase in capital spending is welcomed because it gives capital returns, and one can afford fiscal deficit if we spend on capital expenditure,” said Dr Nayyar.
With a fiscal deficit of 9.5% of GDP, there was limited scope for any significant tax concessions in Budget 2021. Talking about a positive aspect of the budget, he says that taxing at this stage would have been counterproductive to the idea of the stimulus, and the government has suggested that there would be a stable tax framework.
The FRBM Act mandates a fiscal deficit of 3% of the GDP to be achieved by March 31, 2020-2021. The effect of this year’s unforeseen and unprecedented circumstances has necessitated the need for amendment in it. By the views of the 15th Finance Commission, the government is now allowing a normal ceiling of net borrowing for the states at 4% of GSDP for the year 2021-2022.
Dr Nayyar applauded the government’s decision to abandon a fiscal deficit of 3% of the GDP. It was not an appropriate framework for India, significantly when private investments are slowing down. For the foreseeable future, the government must spend on the investments to crowd in the private sector. However, it would be hard to meet the government target of 6.8%, which would depend heavily on disinvestment.
“One side FRBM fiscal conservatism and the other side monetary policy framework which demands inflation targeting has not done a great job for growth in India, as we can see when demand is completely depressed, inflation in India is measured by consumer price index running at 5-6%,” said Dr Nayyar.
Interest rates in India are generally too high for the kind of growth required, partly because of the inflation-targeting framework, which does not work well as it is a demand management framework irrespective of India, where supply factors cause inflation issue. Fiscal conservatism and monetary policy framework have not given India the kind of micro-framework needed for rapid growth.
Thus, it is a welcome step of correcting the FRBM part, but the monetary policy framework also needs to be relooked. The Covid-19 situation has exposed that inflation can be high in India even when demand is depressed. “Interest rates are not a good instrument to control food and fuel inflation; there is a need to correct the overall macro framework for ensuring growth,” said Dr Nayyar.
The banking system is in a mess for several years, and the government’s efforts to recapitalise public sector banks were not solving credit flow and Non-performing Assets (NPA) in the banking sector. Banking being the heart of the economy, it’s necessary to uplift the financial sector. The government has also proposed a wrong bank-like structure to manage non-performing loans better.
An asset reconstruction company and asset management company structure will be set up to take over the bad loans on the balance sheey of public sector banks and manage recoveries. It also proposed to privatise two public sector lenders and one general insurer, which is a big step that will improve governance and lending methods.
India will set up a new development finance institution to raise funds for infrastructure. It will be set up with a capital base of Rs 20,000 crore. It will have a lending target of Rs 5 lakh crore to relieve the banking system of unnecessary stress of infrastructure financing, which is highly long-term with the banking system inadequate to deal with it. “In this budget, there is a more determined effort of coming up with solutions, which will free banking from protracted massive spending to enable growth in all sectors of the economy,” said Dr Nayyar.
Dr Nayyar appreciated the government’s intention to privatise. As part of its economic package to combat the pandemic, the government had announced its intent to exit non-strategic sectors as well as reduce its presence in strategic sectors to a maximum of four firms. But he doubts that there might be no strategic sector. The defense is the most strategic sector in India, it imports 90% of its prerequisite requirements. The Public Sector Undertakings dominate the strategic sector, yet, they don’t produce quality goods. “What is the use of strategic PSU if it can’t meet your defence and oil needs,” said Dr Nayyar.
He added that the government makes the mistake of viewing disinvestments and privatisation in revenue terms, ignoring the major factor of efficiency. Hence, until the narrative of seeking revenues is changed, its execution might be difficult as everyone will focus on how much a company or a particular land asset is sold for. “There is a need for changing the narrative from revenue to efficiency and privatizing lower hanging PSUs first,” said Dr Nayyar.
There is also a need to change people’s narrative as many view organisations’ sale to promoter-owned organisations. However, there is an alternate way of selling by diluting the government shares to below 50%, because the moment it comes below 50%, it will stop being a PSU. “Through disinvestment framework, we could set up firms which are widely held by Public and are professionally managed to unlock a lot of efficiencies,” said Dr Nayyar.
Talking about tariff and trade liberalisation, Dr Nayyar commented that they don’t create competitive manufacturing and require many other reforms. Production-Linked Incentive (PLI) schemes will also enable manufacturing companies to become an integral part of the global supply chains in core competency and cutting-edge technology.
To provide relief to MSMEs, which have been hit hard by the high cost of raw materials, import duties on several steel items have been slashed. Simultaneously, on certain steel products, the anti-dumping duty (ADD) and countervailing duty (CVD) have also been revoked.
“If you have to talk about generating jobs post-Covid, out of 40% of the workforce which comes from agriculture sector producing 13% of GDP, some of them need to go to the manufacturing sector for employment opportunities,” said Dr Nayyar. It is an excellent time to focus on manufacturing as the world is looking to diversify away from China and looking for alternative supply chains. India as a large economy is undoubtedly one potential place for investors. “It is a strategic thrust towards manufacturing and should be given a chance. It should not be viewed negatively,” said Dr Nayyar.
The Budget accorded special attention to the healthcare sector, increasing the overall outlay to health and well-being to nearly Rs 2.25 trillion, rising more than 135% over last year. The enhanced allocation and the plan to look at healthcare holistically – including nutrition, sanitation, clean drinking water and pollution control – certainly augur well for the country. The kind of allocation rise to Jal Jeevan Mission indicates real push towards providing safe and adequate tap drinking water to every household.
Dr Nayyar emphasised the need for a cash transfer programme for the poor, as the kind of direct income support would have helped the poor in these difficult times and boosted consumption. With the availability mechanisms of direct cash transfer and efficient infrastructure to enable cash transfer, cash transfer could have been a welcome step both as a welfare and growth-enhancing measure. “The government is betting on growth rather than redistribution which is a welcome change,” said Dr Nayyar.
Dr Sarma mentioned the need for direct cash transfer. Cash transfer would have helped meet the existing demand efficiency and recovery needed given 38 million jobless people.
In his concluding remarks, Dr Nayyar said that the Indian middle class should be much more invested in medium-term growth, creating opportunities and leading to more income than 5% or 2% tax break. It was a unique opportunity, both politically and economically, because of the budget crisis. It is an overall reasonable budget that will hopefully bring back the economy to its pre-Covid situation, and further enhance it 4-5 years down the line if various budget aspirations are done efficiently and effectively. “We are a slice-of-cake-type political economy and not size-of-the-cake, where everyone is interested in taking their shares, and no one is bothered in increasing that size, so let that size grow first,” said Dr Nayyar.
He also said that implementation is a key and some time back, we never thought a platform such as Aadhaar could be created and become the backbone of the implementation of many reforms and schemes. The government is employing many more technologies across the board for monitoring and governance, so there are ways where the proposed initiatives can be implanted.
There exist values in decentralisations in decision-making and implementation. So, this flexibility will allow more innovation and leveraging the private sector capacity in implementation, especially at the state level for efficiency and productivity improvement. This government has done good work in monitoring and ensuring the implementation of projects.
Dr Nayyar says that disinvestment is the strategy that makes the maximum impact and existing democracy lacks direct hands-on experience in the disinvestment process. Further, ensuring transparency would help the process. However, the listed, profitable and well-functioning firms should do disinvestment first before going for companies such as Air India, which have their own legacy and challenges along with them. Having few success on this front at the beginning of the process would help the government give pace to this process.
He opinionated that he is not a great fan of protectionism or raising the tariff for any length of time and they may not solve the more significant issues. As we are a fairly low-cost economy, we need to address some of the basic problems to enhance the competitiveness of the Indian companies. In India, 90% of the companies are of a micro nature.
To compete, there is a need to have a certain scale to encourage firms to become bigger and use the benefit of scale, which will add to competitiveness. Therefore, tariff should be a short-term measure to strengthen the Indian companies first to improve the supply chain and basic infrastructure.
While talking about demand maximisation, Dr Nayyar said that considering Covid is on its last leg and India, being fortunate to not have felt its impact like the US or Europe, might do well with more vaccinations and recover from uncertainty in few months. He suggests cash transfer to the poor for the period to enable the continuation of demand. However, companies may continue to be cautious even in medium-term before going back to the pre-Covid level of spending. However, it would be interesting to see how reforms such as the three farm bills go as they may impact other planned reforms, especially privatisation and disinvestment.
Dr Arjun shared that some experts have mentioned that the PM-Kisan Samman Nidhi is spending almost Rs 2,000 per quarter for 10 crore beneficiaries. Some inputs should be expended to another five-course families to include other non-farm low-income families. We are also looking at the dynamic budget as the Finance Minister is open to more such initiates.
Dr Nayyar responded that this is an unprecedented time and that is why such initiatives are needed and the government has the option to monetise the system going even further and put in more money. However, this government is taking a cautious approach and the current government is banking on private consumption and private investment, hoping that there would be no need for heavy lifting. The government has extended further spending to other initiatives, including adding more budget to MGNREGA and other programmes. Therefore, all options are open but the government is adopting a conservative approach to monetising.
Dr Arjun pointed out the need to have clean data and ensure transparency for the rating agency to have more faith in the government system. Dr Nayyar responded to this by saying that we should focus more on the growth, as investors will give more preference to growth than others, and being physically deficient can be more impactful once we have good growth in the economy.
On the questions of having a new company proposed in the budget for managing the NPA of the bank by Dr Arjun, Dr Nayyar responded that there is need for the government to make a call between the option of either getting some value of loss-making companies or allowing them to be under government control and letting die down even further.
Therefore, the government may choose to get less valuation while still focussing on ensuring efficiency of that assets class. This will finally enable the market to determine the price for PSUs or any other assets, thereby restricting bureaucrats or the government to control it.
Ms Pankhuri Dutt, Public Policy Consultant, NITI Aayog, said that capital expenditure came at the cost of the revenue expenditure, and thus, there was a need to increase total spending. Revenue expenditures would have to lead to more job creations than capital spending. There exists a dichotomy in the budget as well, especially in the health sector.
While talking about health sector schemes, Dr Nayyar agreed that there was no need of bringing up a new scheme in the health sector because sectors such as health cannot be centrally driven due to variations in requirements for different states. Some of the schemes of social sectors such as health and education should be left for the states to decide rather than driven as centrally sponsored.
While responding to targeting income taxpayers through direct benefit transfers and giving employment benefit incentives to small firms, Dr Nayyar said that it’s challenging to achieve the disinvestment target unless the government sells three blue-chip PSUs, which is a difficult task to be implemented in one year. However, he refrained himself from the idea of raising taxes, and said that any incentive for imparting growth will be worth it. Thus, he emphasised being growth-minded rather than being revenue-minded.
Dwelling upon the reason for not getting the dividend of the kind from the GST was because it was based more on political knowledge than economic logic. As we go forward with the GST Council, they should not focus on rates to meet a particular target. Rather, there is a need to have a stable GST environment to ensure growth.
Ideally, we should have only two revenue-neutral rates of either 0% or 12% because five tax structures lead to rent-seeking and inefficiency. Less discretion and lower rates lead to growth, thereby providing enough revenues. “For growth and revenue dividend we need to take a slightly longer view, there is a need to focus on rates to get efficiency which will in turn lead to achieving targets,” said Dr Nayyar.
Dr Kumar talked about the national infrastructure pipeline and many industrial corridors that have been proposed along with the Smart Cities Mission and in terms of doing ease of doing business, there is a need to instil confidence and competitiveness in the market. While talking about good governance and the hindrances faced by private investments, Dr Nayyar commented that corruption is a human condition that is prevailing in every sector of society at different income levels. However, to minimise corruption, we should use maximum technology and as little discretion as possible.
There should be right incentives and right systems in place. There is a need to recognise the importance of pace in transparency and self-certification to attract investors and private investments. We need to stick to present corporate taxes for 10-15 years to impart confidence in investors. “The idea of embedded clearances should be pushed to attract private investors,” said Dr Nayyar.
While talking about the prospects in technology, emphasising on the importance of data, Dr Nayyar said that there is a need for a skilled workforce to adapt. Also, a bigger economy can only provide social security in conditions of major job losses, which need to be aimed at. Further, he commented that any big change comes up with resistance and managing it is important.
Prof Atul Sarma pointed that budget had a fiscal consolidation approach. He also emphasised the importance of research and development in the manufacturing sector. He further questioned, “Was it not necessary in manufacturing to attempt to go for judicial reforms or are there any judicious ways to attract a high-cost economy?”
Dr Nayyar responded to this by saying that judicial reforms play an important role in imparting confidence, but these reforms lack pace in getting a resolution. He said that research and development is something that the Central government, rather than the state governments, needs to take up. There is much more required in research that is merely being fulfilled by the budget allocated to it. The department of science And technology should be given much more importance because that is the future.
Prof Atul Sarma mentions that for a demographic dividend, we need to invest in social sectors and allocate more to the education sector, which has gone down in the budget and is a matter of great concern. Human development is essential because without it, we will not be able to attain demographic dividend. Adding to this, Dr Nayyar commented that the entire education system needs a relook in terms of the actual outcome with regards to learning and employability. Hypocrisy in the education system for not allowing for-profits should attract clever entrepreneurs who can develop business models at scale to provide quality education.
Talking about the service economy, Dr Nayyar commented that the IT, telecom and aviation sectors have done fairly well. Still, other sectors including tourism, health, education and banking need a boost up. These sectors can give up foreign exchange, GDP growth and job. The sectors of health and education can also be seen as growth sectors rather than just being judged as social sectors.
On the issue of the FDA with China, he responded that it may not be very useful, but if whether we decide to join or not, we should use it to make ourselves structurally competitive. However, he pointed out that the FDA will not help us transform ourselves due to improving competitiveness. Dr Nayyar also pointed out that India has a huge potential to improve, do better and help other countries. He shared that many countries such as China, Korea and Taiwan have increased their per capita income and India has to do a lot.
He shared that we should focus on speed, scale and growth while expanding the base of Indian economy and lastly, he shared that it’s not the government who should lead the economic growth but the role of new-age entrepreneurs in India. Regarding Atmanirbhar Bharat, he shared that it should focus on self-improvement and making our ourselves a more competitive economy.
In the end, Prof Atul Sharma and Dr Arjun Kumar thanked the speaker for his enriching and balanced view while being optimistic about the economic growth and the country.
Written by: Dr Soumyadip Chattopadhyay, Dr Arjun Kumar, Ritika Gupta, Anshula Mehta, Nishi Verma, Impact and Policy Research Institute (IMPRI)