Union Budget 2021-22: What should we expect beyond populism?

The annual Budget in India is not a routine statement of income and expenditure of the government under different heads. It traditionally provides an indication of the changing policy priorities and new initiatives of the government. These priorities, in turn, are determined by the economic challenges before the country which the Budget sets out to tackle.

What are the major economic challenges before the nation today? GDP growth has turned negative as a result of the economic dislocation caused by the pandemic lockdown. But even before that, the growth rate had been clearly slowing down. The economy will gradually recover in 2021-22 as a result of mass vaccination and herd immunity. But that is not enough. For the Indian economy to move to a higher growth path compared to the declining trend before the pandemic, some major structural reforms are needed.

Apart from loss of jobs, the pandemic has forced many people to move to lower paying jobs. Recovery has been more in the formal sectors like autos, tractors and 2-wheelers, reflecting release of pent-up demand, whereas FMCG consumption remains subdued. More labour-intensive sectors like travel, transport and services are yet to pick up. SMEs and poor people have suffered more, needing relief and income transfers from the government. Despite negative GDP growth, cost-cutting in the corporate sector has resulted in higher profits which, together with the abundance of cheap global funds looking for investment opportunities, is causing stock markets and foreign exchange reserves to go up.

The economic stimulus as a percentage of GDP in India has been less than that in most countries. Economists are recommending (and the government seems to agree) that now is the time for more government spending on infrastructure, public health, and income support, even if it causes a temporary rise in the fiscal deficit. The international credit rating agencies and foreign investors would be more worried about low growth than rising fiscal deficit.

The pandemic experience has induced many countries to go in for diversification of sources of supply by taking a China-plus strategy. This, along with rising labour costs and anti-China sentiments in the West, are opening up new opportunities for manufacturing in other countries, including India. Whether India would be able to attract new foreign investments in manufacturing would depend on the quality of infrastructure, ease of doing business, tax rates, stability of policies, and the cost of land, labour, capital and energy.

The political will of the government to take up structural reforms has suffered a big dent as a result of the ongoing agitation over farm laws. Most sensible economists agree that it is not sustainable to have guaranteed and rising MSP, much above international prices, for grains like wheat and rice which inevitably causes production far in excess of what is needed for food security and PDS. The government’s subsidy bill is skyrocketing as it first has to pay rising production subsidies (including MSP, free electricity and subsidies on inputs like fertilizer and irrigation water) and then provide consumption subsidy to the poor to offset the production subsidies. At the same time, there is growing demand for vegetables, fruits, pulses, oilseeds and dairy products which, thanks to the perverse incentives provided by the MSP regimes for rice and wheat, is causing shortage of such products and rising food inflation. Mounting subsidies imply less funds for development expenditure on infrastructure and improving the quality of public services like education and health.

One political option left before the government is to go in for reforms through decentralisation. Here, new initiatives -- be it in agricultural incentives, labour laws, land acquisition or social welfare schemes -- should be left to the states. But for this to work, states need more funds and policy autonomy. Here, again, electoral politics is a big hurdle. The central government would not be willing to pass on more funds and decision-making powers to the states as then the political benefits from the exercise of discretionary allocation of funds and favours accrue to the ruling political party and its leaders at the state level, especially when several states are ruled by opposition parties.

So, given these political realities, what can we expect to see in Budget 2021-22? More funds would be allocated to infrastructure, health and education sectors, at the cost of a rise in fiscal deficit. Rising GST collections and more proceeds from spectrum allocation and disinvestment of public sector enterprises would help moderate the projected fiscal deficit numbers for 2021-22. More new social welfare schemes and more cash transfers to farmers (to placate the farmers’ lobby) would be announced. These would be on top of all existing subsidies.

We may see the announcement of new schemes involving greater use of information technology in education, health and governance. Some token reliefs are likely for taxpayers in the lower slabs as well as senior citizens who are being squeezed between falling bank interest rates and rising prices. We may also find further tinkering with import duties and production subsidies to support ‘Atmanirbar Bharat’ mission. More mergers of banks and recapitalisation of troubled banks may find place in the Budget.

Populism – in the sense of catering to the benefits of the majority -- is inevitable in a democracy. The danger occurs when ‘populism’ implies short-term benefits like providing free electricity and allowing stubble burning which comes at the cost of longer-term benefits like 24-hour power supply and a pollution-free environment.

Last but not the least, the biggest bane of Indian governance continues to be the implementation deficit. Though decentralisation through municipalities and village panchayats has improved matters, widespread corruption and lack of accountability still plague the landscape at the grassroots level. The announcement of more schemes is easier and more rewarding for politicians than improving implementation by cutting out corruption and diversion of benefits from the intended beneficiaries.

(The writer is a former Professor of Economics, IIM Calcutta, and Cornell University, USA)