Good budget but big challenges remain

Budget 2021 has been prepared in the era of the most unusual challenge posed to the economy after independence. Due to the Kovid epidemic and the lockdown imposed on it, there was an unprecedented 16 per cent drop in gross domestic product (GDP) in the first half of 2020-21, but the situation has improved rapidly since the lockdown slowed. According to official estimates, GDP will reach the level of 2019-20 in the second half. Initial estimates of a record 7.7 per cent decline in GDP for the current fiscal year were made. The loss of employment due to this was very high and the recovery process has been very slow. Even today, crores of people are facing loss of employment and earnings. Surprisingly, inflation has remained elevated for most of this year. Fiscal deficit and government debt reached record levels due to falling revenue and increasing expenditure. Foreign trade collapsed and its recovery has also been somewhat weak. In this challenging perspective, the Finance Minister and his team have presented a fairly good budget.

The Finance Minister has done a particularly good job of bringing transparency to the budget figures and showing the truth as these figures have been misleading in recent years. Secondly, he has shown his government’s decisive commitment to the privatization of generally weak government enterprises, which is reminiscent of the Vajpayee-Shourie era of nearly 20 years ago. Thirdly, the Finance Minister has also announced the launch of a program for privatization of the state-run banks in critical condition. India’s long-stressed banking sector is still dominated by public banks. Privatization of these banks will only end the very costly and long vicious cycle of stranded debt, depreciated capital and recapitalization from the public exchequer.

It would be useful to pause a little to point out the major challenges facing India and understand the provisions made in the budget to deal with them. The challenges are as follows:

1. Restoring production levels to ensure strong growth in FY 2021-22

2. Stimulate medium-term rapid growth beyond 2021-22

3. To remove the widespread impact on employment and livelihoods due to shocks like pandemics, lockdown and demonetisation.

4. Preventing consumer inflation from going above six per cent

5. Encourage trade and export recovery with East and South-East Asian countries.

If the government estimates are correct then the GDP has already achieved the level of 2019-20. This simply means that even if there is no further progress in GDP, it will show an increase of around nine per cent compared to 2019-20. With an additional growth of around 1-3 per cent, the annual growth in 2021-22 could be in the range of around 10-12 per cent. The fiscal deficit reassures the Finance Minister’s budget for double-digit growth in the year 2021-22, owing to consistent 7% GDP GDP and the emphasis on health and infrastructural expenditure and confidence-building corrective efforts.

But ensuring high growth of more than seven per cent in the medium-term will be more challenging. Past policies and epidemic shocks have given three major blows to medium-term growth prospects. First, the amount of government debt is very high (its GDP record is expected to be 90 per cent by March 2021), which is the result of an unprecedented 14 per cent unforeseen deficit of the Center and States in this epidemic year. The government debt ratio is unlikely to decline this year, with the combined deficit expected to remain at a high of 11 per cent in 2021-22. Second, according to recent estimates by the Reserve Bank of India (RBI), the ratio of non-performing assets (NPAs) in the banking system to 14 percent or more by September 2021 can be used to finance productive economic activities and investments. Will greatly weaken its capacity. The budget announcement about the privatization of state-run banks and the creation of half-baked bad banks raise hopes for the future. But even if there is quality implementation, it will take years to overcome the high levels of stress in Indian banking.

Third, the increasing protectionism in our trade policies since 2017 will have a strong impact on our growth prospects. In this case the budget was disappointing in the sense that the already high import duty has been continuously increased. Budgetary aspirations to increase India’s participation in global and regional value chains will hardly be met by such manipulation.

In short, this budget makes little effort to strengthen growth even after 2021-22. I have said earlier that it would be difficult to exceed even the average of five per cent growth in the medium-term. There is nothing special in the budget to remove the sad situation regarding jobs and livelihood. The official manpower survey for the year 2017-18 showed that all indicators of labor market health are at very low levels. In the two years since then, the rapid sluggish economic growth and the severe trauma of the epidemic and lockdown have worsened the situation, especially in the informal sector where 85% of India’s workers are employed. Yes, employment opportunities will also improve as conditions continue to improve from the low level of lockdown. However, surveys conducted by the CMIE, an organization that monitors the Indian economy, show that the situation on the employment front remains quite miserable.

Fourth, both the government and the RBI will find it very difficult to keep inflation below 6 per cent next year. Even after all the revenue and expenditure targets of the budget have been achieved, in another year with very high fiscal deficit, financial provision will require borrowing of about Rs 10 lakh crore from the market, which will be 60-70 per cent higher than the pre-epidemic. To make the lending program a success without a significant increase in interest rates, the RBI must certainly keep the liquidity situation exceptionally comfortable. Excess liquidity may increase inflation further as private activity improves. Had the Centre’s budget deficit been less than one per cent, there would have been more chances of keeping inflation below six per cent.

Finally, the budget has not cut protectionist trade policies, so the trend of lowering the share of exports in GDP is expected to continue. This will weaken the medium-term viability of our balance of payments and slowdown in growth impulses. But we cannot expect to overcome all our economic problems with a single budget.

(The author is Honorary Professor of ICRIER and former Chief Economic Advisor to the Government of India)