Atmanirbhar Bharat: Some are born atmanirbhar (self-reliant/self-sufficient), some achieve atmanirbharta, and some have atmanirbharta thrust upon them. This is likely to be the dominant theme for different sectors of the economy in the coming Budget. Oddly enough, the push towards atmanirbharta may not mean a reduction in the government’s intervention in the economy and a decided move towards a greater play of market forces. Far from it. It will likely be a mix. For instance, if you are a farmer, the state may recede in favour of the private sector but if you are a steel manufacturer or dairy producer, the state may protect you from international competition.
Behavioural change… of consumers and businesses. One of the most important things to watch out for in the Budget would be the policy tools employed by the FM to change the behaviour of different economic entities in the economy.
Covid not only forcibly reduced consumption in the short-term but also crimped incomes and scared people into saving more than usual. But if consumers continue to spend less, then it will delay economic recovery. The RBI has already brought down interest rates to disincentivise savings. For its part, the government can cut direct taxes — indirect taxes are within the ambit of the GST Council — as it did in the LTC cash voucher scheme last October.
Similarly, Budget may announce steps to incentivise the purchase of affordable houses, cars etc.
Similarly, investments by businesses had been falling even before Covid hit. Unsure if consumers will spend, businesses continue to hold back fresh investments. In 2019, the government cut corporate income taxes. Now it will have to find other ways to incentivise investments.
Cesses and Surcharges: Of the two certainties of human life — death and taxes — only one can be compounded. When a Central government imposes a new tax on an existing tax, it is referred to as a Cess (if it is for a specific purpose, say, Swachh Bharat Cess) or a surcharge (if purpose not specified). For taxpayers, a tax by any other name would cost just as much. But for Centre, Cesses and surcharges smell sweeter than regular taxes because such revenues don’t have to be shared with the state governments. Don’t be surprised if a Covid Cess makes an appearance on Monday.
Debt: There is tough competition for this letter this year. You are likely to hear a lot about Digitalisation — across fields. You might also learn how pent-up Demand has led to India’s ‘V-shaped’ recovery or what the Budget will do to bolster India’s Defence against Chinese aggression.
But the most important word this year could well be “debt”. Or, to be precise, Debt-to-GDP ratio. The Budget may signal a shift away from targeting fiscal deficit (or total borrowings) as a percentage of GDP to targeting total debt as a percentage of GDP. Total debt is nothing but the debt of the past years plus the borrowings in the current year. The significance: this shift may allow the government to spend more (breaching the existing fiscal deficit norms) in the next few years and still appear to be fiscally responsible.
Education: Apart from the hit to the physical health of Indians, especially child malnutrition, Covid’s second-biggest long-term adverse impact is the disruption of educational attainment. Even without Covid, India’s educational achievements were alarmingly poor as showcased repeatedly by annual ASER reports. The past year has deepened inequalities thanks to the digital divide. Expect the Budget to redouble the government’s efforts to bridge the digital divide. If this happens, it will be a small price to pay to put up with a slew of rather inelegant policy names starting with “e—”.
FDI and FPI: For a country that suddenly decided to become atmanirbhar after Covid, it is quite remarkable how India routinely celebrates every increment of foreign investment — direct or portfolio. Of course, India is a capital scarce (read poor) country and so it makes a lot of sense to acknowledge foreigners investing in India. PM Modi has promised to be the bridge between the cash-rich foreign businesses and India.
GDP growth: The government aims to turn India into a gas-based economy (no pun intended). This involves improving gas pipeline connectivity as well as turning farmers from ‘Anna (food)-data (giver)’ into ‘Urja (energy)-data’. However, the more important question that the Budget has to answer is: What will drive fast economic growth in a sustainable manner?
India’s growth rate decelerated sharply from 8.3% in 2016-17 to 4.2% in 2019-20. In other words, just before Covid hit India at the end of 2019-20, India grew by just about 4% with almost all engines of growth — private consumption, business investments, and exports — faltering. Government spending, the last engine, can boost growth in the short-term but fast growth cannot be sustained without private consumption and business investments.
Healthcare: The central takeaway from Covid is that India’s private healthcare infrastructure — as efficient and as affordable as it may appear in global comparisons — is neither as efficient nor as affordable in times of a crisis. The upshot being: India needs to boost investments in public healthcare provisioning. For a country of India’s size and GDP, Indian governments have spent abysmally low on healthcare. But the massive demand for healthcare is also an opportunity for India to grow and create new jobs. If a once-in-a-century pandemic can’t induce a quantum leap in healthcare budget, what can?
Infrastructure: No matter which way one looks at it, the past year has seen a massive rise in inequality. The rich have got richer and the poor have got poorer. For instance, in 2020, India’s per capita income has fallen to levels last seen in 2017 and the average GDP contracted by over 7%. Yet, listed companies retrenched employees and cut expenditure to notch up 20%-25% profits on average. In essence, the losses of the have-nots were far deeper than what the average decline shows. Informal, unskilled, young, women — all have found themselves significantly worse off. But, given the parlous state of government finances, it is unlikely that inequality will elicit a significant response.
Jobs: Persistently high unemployment not only reflects poorly on the government but also threatens social order. Even before Covid, India was witnessing very high levels of unemployment — the highest in several decades. Covid just made that worse. The government can either focus on financing ever-growing social securities or take a leaf out of Thomas Sowell’s book when he says that “the real minimum wage is zero unemployment”.
Kisan: The farm sector suffered due to back to back droughts in 2014 and 2015 before demonetisation in 2016 turned out to be an even bigger strain. Since then, however, farmers have enjoyed political heft via forcing massive loan waivers and the first-of-its-kind direct cash transfers scheme — the PM-Kisan (Kisan Samman Nidhi) Yojna. But since the passage of three farm laws last year, the distance between the farmers and the PM seems to have increased. Raising the outgo under PM-Kisan is one way to assuage hurt farmers.
Labourer: Last year saw lakhs of migrant labourers first getting stranded away from their homes and then, in the absence of timely and adequate support from the government, literally walking back thousands of miles. What made matters worse for them was when several states decided to summarily disband almost all labour laws under the misplaced notion that setting aside even minimum wage and the most basic safety requirements would somehow lead to a surge in corporate investments. For a while, they were provided succour through the much-maligned rural jobs guarantee scheme. But as the economy returns to the normal rate of functioning, there is a need to ensure that India’s labourers — migrant or otherwise — do not suffer the same way again.
Medium-term: Each year, the government’s Budget documents include a thin note called the “Medium term fiscal policy cum fiscal policy strategy statement”. This is rarely read by most because budgets are, by definition, annual exercises. But this year, there is more curiosity about India’s “medium-term” prospects — roughly the period between 1 to 5 years hence. Why? To ease the demons of uncertainties and provide a predictable policy environment for all economic agents to get back to normal economic behaviour.
NPAs: It can be argued that the biggest macroeconomic hurdle facing the Indian economy between 2010 and 2020 (until Covid hit) was the high level of non-performing assets (NPAs) in the Indian banking system. These, in turn, hit the bank’s profitability. In the past decade, several public sector banks suffered such high NPA levels that even their viability came under question. Covid is expected to almost double the level of NPAs when India starts recognising the true extent of damage next financial year. The FM would thus need to budget for money that the government would need to “recapitalise” public sector banks. In other words, just like India has pent up demand driving the recovery, it also has pent up bankruptcies that are less talked about.
Output loss: In the current financial year, India’s growth will contract by almost 8%. Next year (2021-22), it will rebound and grow by 11%. Net result: At the end of March 2022, India’s GDP is likely to be just 2% higher than what it was in March 2020. That implies that India would have lost 9-10% of GDP over the two years. This is the output loss and the real measure of how badly economies were affected due to Covid. How does India compare? According to calculations by Gita Gopinath, chief economist at IMF, the global average would be just a tad less than 4%. The US and China would have lost just about 1-1.5% of GDP while emerging economies in Asia (including India but excluding China) would have suffered almost 8% output loss.
Poverty: By all measures, the pandemic would have raised the level of poverty in the country. The fact that no less than 80 crore Indians — that’s roughly 60% of India’s population — had to be given free rations underscores how vulnerable India is in terms of poverty. From a policy perspective, the trouble starts with India’s last official estimates of poverty being almost a decade old.
Quality of life: Over the past few years, as India lost its growth momentum, there has been a vigorous debate about whether GDP is the right variable to evaluate growth. GDP does not point out how rising pollution or inequalities impact our long-term growth sustainability. Nor does it capture our happiness, the wholesomeness of our relationships or the overall quality of our lives. It is no fault of GDP though — it is just a measure. If we want to assess the quality of our life more accurately, perhaps we should have a different measure. Perhaps the new measure would be able to capture the unpaid care work that women silently provide or the diminution one suffers on the basis of caste, creed, gender or income.
Reforms: The one unchanging truth about policymaking in India is: “Everything is a reform”. When restrictive labour laws were brought in, it was a reform. When labour laws were repealed — even to the extent of not requiring to pay minimum wages — that too was a reform. When minimum support prices were introduced, it was a reform; when they are being phased out, it is a reform. When MGNREGA is implemented, it is a reform. When it is berated, it is a reform. When it is persisted with, that again is a reform. Basically, nothing that any Indian government ever does is anything short of reform. Be ready for more reforms.
Skills: Data shows that even without Covid, formal manufacturing in India has grown more and more capital intensive over the years. In other words, firms are replacing labour with capital (read machinery). This is true even for the so-called labour-intensive sectors such as textiles, leather and jute. While this may be great for consumers, for the large swathes of unemployed and lowly skilled Indians, this is a terrifying prospect. The government hopes that the private sector (see W) will create the millions of jobs required to soak up India’s labour force. But that may not happen thanks to a continued preference for automation to drive down costs. Skill up-gradation and re-skilling is no longer a question of policy choice; it is an imperative.
Tax relief: Before every Budget there are two innocent-sounding demands from the people. One, they want the government to spend more and two, they want the government to reduce their taxes. Of course, both things can’t happen because the government’s money is nothing but the taxpayer’s money. From the government’s perspective, the trick lies in choosing who to tax for raising the additional revenues. In 2019, for example, before the Lok Sabha election, the government provided income tax relief for individual taxpayers. After the elections, it sharply cut corporate tax rates.
This year, though, it is unlikely that any massive tax relief will happen because the government is already struggling to meet its expenses.
Urbanisation: That India lives in its villages is no longer just a fact but the articulation of a problem. If India has to grow — that is, if India’s per capita GDP has to rise — then Indian cities have to grow and prosper. There are just too many people in rural India and not enough scope for increased productivity in our villages. The question is: Do our cities have that potential? Can they provide basic amenities for India to transition into a broad-based modern economy? Does our Budget reflect this vision?
Vaccination: Even though India prides itself for taming the Covid curve, the return to normal growth will depend on how quickly and effectively India vaccinates itself. The global collaboration around finding the Covid vaccine also puts in perspective the calls of being “vocal for local”.
Wages vs Wealth Creators: Over the years, the relative size of the Central government budget has reduced. Today, all the states spend 1.5 times the Centre. The Centre cannot be the prime job creator for the country. The push towards disinvestment and privatisation should be seen in this context. PM Modi has repeatedly exhorted the importance of “wealth creators” in a move to present businessmen and women in a more positive light. This is happening at a time when wages — the fruits of labour (as a factor of production) — have barely grown. In fact, according to International Labour Organisation’s Global Wage Report 2020-21, in India, formal workers’ wages were cut by 3.6% while informal workers have experienced a much sharper fall in wages of 22.6%. Contrast this with over 20% profits booked by listed companies (entrepreneurs) last year.
X-factor: India is coming back from its worst year as an economy. On paper, the coming year will likely see double-digit GDP growth rates. It is unlikely that the FM will not capture the essence of this confidence in the form of some poetry. So which poet will it be this year? Tamil poet and philosopher Thiruvalluvar has already been pressed into service far too often. President Ram Nath Kovind has already quoted Malayalam poet Vallathol. The odd-on favourites is Tulsidas with some rousing couplet from Ramcharitmanas but, given the farmer protests, the dark horse is Guru Tegh Bahadur.
Youth: According to the UN Population Fund, India will continue to have one of the youngest populations in the world till 2030. It is also true that India has the most number of malnourished children in the world, one of the most malnourished adolescents population, the highest number of poor on the planet. On education too, India’s massive technical pool cannot hide the millions of unskilled (read unemployable) and unemployed youth. As the first one for this decade, this Budget has its job clearly defined.
Zzzzz: Abraham Lincoln, the greatest American President before Donald Trump (according to Trump), once apologised thus: “I’m sorry I wrote such a long letter. I did not have the time to write a short one.” Last year, FM Sitharaman delivered the longest-ever Budget speech — lasting almost 2 hours 40 minutes. Hopefully, she has had the time to write a significantly shorter one this year.