Five things to judge the budget by PDF Print E-mail
Monday, 01 February 2021 00:00
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Expenditure growth has to be high, a lot of privatisation, no new cess, big infra-push & 1991-style sweeping reform

Whether the finance minister can pull off the once-in-a-century budget she spoke of remains to be seen, but it is clear she has a daunting task. She must spend a lot to take care of the Covid-induced collapse in, especially, the informal part of the economy—else, the economy will remain sluggish after FY22—but, at the same time, convince bond markets, and rating agencies, that this is a one-off that will make both debt and deficits reduce over 2-3 years.
And since she cannot spend enough to offset the slowing private consumption or the collapse in investment and export levels, she needs 1991-style reforms to boost investor spirits and put India back on the export path. Over the last seven years, investment and exports have fallen by nearly 12% of GDP; fixing this requires a different strategy.
Deciphering a budget speech is always confusing, this year will be worse. After falling by 8-9% in FY21 vs FY20, FY22 taxes will be 16-17% higher than the actuals in FY21, but they will still lower than those budgeted for FY21! So how do you evaluate the budget?
The first number to look for is expenditure. In the last five years, Central expenditure rose by 10% annually; in FY22, it must rise by 15-16% for any meaningful repair of the economy. This is a temporary fix, to keep the economy ticking, to ensure those who lost jobs can survive till such time that, when growth is back, they can return to their jobs.
And while higher expenditure could mean higher interest rates, raising expenditures is difficult since a large part of it grows very slowly. Salaries and defence account for around a fifth of the budget, but they  grew by less than 3% in FY21; pensions account for another 7% or so, and while they grew 14% in FY21, they grew by under 6% in FY20. Roads and highways which, under Nitin Gadkari, is probably the most efficient infrastructure ministry, managed to raise its expenditure by around 14% annually over the last five years but not everyone can replicate the performance.
The Rs 100-lakh crore National Infrastructure Pipeline (NIP) over the next five years is an integral part of the budget, but achieving the target requires near doubling of the expenditure made in the last seven years. A fourth of NIP’s capex is to be invested in the power sector but who will invest if, despite a plethora of ‘reforms’ like UDAY over the last few decades, the state electricity boards (SEBs) remain bankrupt and unwilling to change; one way out is to allow RBI to deduct state government accounts if SEBs default on payments, as they routinely do, but prime minister Modi has stayed away from this (this is where the 1991-style reforms will help).
If line ministries can’t bump up expenditure quickly, including on MGNREGA, maybe cash payments of Rs 500 per month for a year to the bottom quintile can be thought of; if families know they will get the money for a year, they are more likely to spend it instead of trying to save.
In this context, there will be a temptation to find some way to tax the rich to defray part of the costs, possibly through a Covid tax or surcharge, a one-time wealth tax, etc. This is a bad idea since taxing the rich will lower demand whereas the need right now is to increase consumption; only when demand rises will capacity utilisation in factories rise from the 65-70% it is right now, and only when it is up to 85-90% levels will the investment cycle resume. The top 10% of the population account for around 22-23% of consumption and around 30% of income in the country.
Also, when even something as draconian as demonetisation couldn’t get too much money from the rich, it is quite likely they will find a way to escape any major tax imposition or scheme to get part of their wealth; the signals it sends in terms of the government being confiscatory is an even bigger issue, so any fresh tax is to be avoided.
A better idea is to go for a massive PSU sell-off, say, of around 1-1.5% of GDP, to help finance the increased expenditure. But since the government has almost always failed to meet its target—even the FY21 budget had a Rs 2.1 lakh crore selloff target—this needs to be done differently. And while the new PSU policy the FM has spoken of envisages retaining just 3-4 PSUs in strategic sectors while selling off the rest, keep in mind that many attempts at big privatisation like Air India have failed; also if, as it did for banks, the government decides to merge PSUs to reduce their number, it doesn’t really help.Ideally, the government should look at selling Rs 15-20,000 crore of PSU shares every month regardless of their price, a Systematic Withdrawal Plan (SWP) in quite the same manner people invest in mutual funds via Systematic Investment Plan (SIPs) of a fixed day of the month.
Since the government did not have an SWP in FY21, it is likely to raise just Rs 30,000-35,000 crore this year; to put this in perspective, in just April to November this year, India Inc raised Rs 1.4 lakh crore from equity markets. By the way, since Modi first came to power, while the BSE market cap rose 2.2 times, that of PSUs fell 9%; that means every day the government holds on to PSU stocks, it loses money.
Last, watch out for 1991-style reforms. Genuine PSU privatisation could be one such reform and, if that happens, even if overall demand doesn’t pick up, firms may want to buy good assets priced attractively. Indeed, NIP can’t take off till there are a series of reforms such as in the power sector and, as this newspaper has documented so assiduously, if government policy improved, many industries like telecom and oil & gas would jumpstart investments immediately. But what they want is consistent policy aimed at helping industry resolve issues immediately, not sclerotic policy that promotes PLI and cuts tax rates one day but challenges the Vodafone arbitration ruling the next.

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