India’s turnaround Budget

Indian Union Budget 2021-22: After a dismal run for India’s economy, including policy missteps and the enormous shock of the pandemic, the new Union Budget has the potential to mark a turning point for Indian economic policymaking, as well as for the economy. In some ways, the specific plans in this Budget represent the next step in the process of redrawing the boundaries between government and market, which began three decades ago. Let us note the positives of the Budget, and why it is so promising, before registering some cautions.

The consensus is that the Budget represents an improvement in fiscal accounting, as well as greater realism in projections. Food subsidies are being brought on to the Budget, revenue projections are conservative, and the government is ready to acknowledge a higher fiscal deficit for the next year. The GST structure has removed earlier tendencies to fiddle with various indirect tax rates—stability, simplicity and predictability in taxation are valuable characteristics. In direct taxation as well, the Budget does not engage in tweaking of rates, though there are some changes in exemptions, and there do seem to be steps taken to make corporate taxes less subject to discretion and negotiation.

The Budget also focuses expenditure on two very obvious areas, rather than announcing a heterogeneous collection of welfare schemes, or grand new missions. There are plans for increased spending on public health—absolutely necessary for keeping the pandemic more securely in check, beyond the current lull—and on public infrastructure. The latter is to be accompanied by reforming the way in which infrastructure is financed and managed, so that risks are allocated in a more efficient way between the public and the private sector. This reform will benefit existing infrastructure, as well as new projects.

Another positive development is the plan to expand the scope of privatisation and disinvestment, including a couple of smaller public sector banks, and the giant Life Insurance Corporation of India. Already, the ongoing plan to privatise Air India seems to be progressing much further than the previous failed attempt. So there appears to be some real learning-by-doing, and an indication that privatisation plans are now meant to go beyond good intentions alone. As recent events in other arenas show, this government is willing to undertake unpopular reforms.

Other positive developments signalled in the Budget include liberalisation of FDI in insurance, policy changes to make aircraft leasing easier, streamlining of some aspects of financial sector regulation, and a renewed focus (after the pandemic-induced pause) of trying to clean up the balance sheets of banks. This last issue is by far the most urgent task that the government faces, if the economy is to return to robust growth.

All of the above represent prospects for positive impacts on the economy. In some cases, their promise or potential will require rigorous implementation, and that is not yet a skill that the government seems to have mastered. But it has considerable domestic expertise to rely on now, especially in the financial sector, if it chooses to draw on those sources.

There are also some areas where the Budget’s policy signals are less positive. Continued tinkering with, and raising of, import duties is not conducive to industrial growth, despite the objective of giving more protection to Indian industry in certain sectors. The government would be better off looking for other ways to support industrial growth, including making sure that the needed public infrastructure is built quickly. Even reliable, low-cost electric power is still a problem for many Indian firms. There are plans to address the deficiencies of power distribution in India, but they may not be adequate, given the deep problems in this area.

The Budget proposal for a cess that is earmarked for agricultural infrastructure development also seems somewhat retrograde. Cesses in general have the property of eroding fiscal federal arrangements, since they are not shared with the states. And it is not entirely clear that the central government is in the best position to make decisions on rural investment, rather than the states. It is unfortunate that the agricultural marketing reforms were so poorly handled, because there could have been an opportunity for the Union government to reform food procurement, build out alternative infrastructure, and incentivise diversification before tackling agricultural marketing.

It may also be that the Budget does not do enough for those who have been most severely affected by the pandemic, losing livelihoods and savings. A trickle-down approach may not be enough to help those at the bottom of the pyramid who are in immediate distress, although the Budget does include plans for creating institutions to support migrant and unorganised workers in the future. The plan to use digital information portals in this context is also a reminder that the government’s ambitions for digital technology to improve its reach and the quality of the services it provides citizens may be running ahead of its plans for building the requisite digital infrastructure. In every sector, it is likely that the current digital infrastructure, both hardware and software, will not be adequate for the economy’s growth. Relying on one or two large private players, and on the government’s own capabilities, may not be adequate for what India will need over the next few years.

The author is professor of Economics, University of California, Santa Cruz