Our budget priorities for a year of predictable unpredictability
PremiumAim for wise outlays, tax stability and reductions in the deficit and scope for regulatory arbitrage
On 1 February, India’s finance minister will deliver the fourth budget of the second term of Prime Minister Narendra Modi. In spite of the fact that two years of the term have been taken up by the pandemic, the government’s record on economic reform has been fairly creditable.
Being a mid-stream budget, one would not expect any path-breaking reforms; rather, a furtherance of past policies. However, covid has seriously altered the economic and social landscape. The Economist has aptly described this as a period of “predictable unpredictability". Globally, inflation has reared its ugly head, abetted by a sustained period of loose monetary policies in advanced economies, and aggravated by supply-chain glitches and chip shortages. Eventually, this trend will impact India, as also steps taken by the US Fed to contain inflation.
Therefore, the budget will have to steer a threefold course: First, drive inclusive growth; second, maintain stability; and third, expand reforms.
In 2021, India saw the highest digital transactions in the world, thanks to major government initiatives, leading to a high level of financial inclusion. The Unified Payments Interface (UPI), a host of startups and the conventional financial sector also contributed. The UPI platform can be used to reach the poor and improve the ease of doing business. Skilling programmes and a new digital university could add to human capital.
Pandemic-induced unpredictability has compressed demand. That limits the scope for immediate private investment in additional capacities. Thus, sustainable growth would require continued investment in infrastructure. The National Infrastructure Pipeline and Gati Shakti are important initiatives. But long-term finance can only come through a strong bond market. This calls for a slew of initiatives, such as getting Indian bonds included in global indices, credit enhancement mechanisms, and deepening the bond market. Also, the space available for non-Indian resident holdings of domestic corporate bonds needs to be enlarged.
Limited government capital expenditure has to be used innovatively. For example, provisions for rural development, such as for the rural employment guarantee, may partly be used to create rural infrastructure like village-level warehouses. That will generate sustained rural employment and also improve agricultural incomes. Similarly, capital spending on defence can be directed at domestic manufacture.
Housing is one sector with pent-up demand. But ownership patterns are changing. The younger generation is mobile and does not want to get tied to a house they have bought. Rental housing is an idea whose time has come. It can meet the housing needs of a very broad cross-section of society. The paradigm here is shifting, though, and may call for an examination of financing needs as well as good-quality regulation of the country’s rental market.
Considering the fiscal constraints, tax cuts are not expected. Continuing a regime of tax stability would embolden the corporate sector to invest once consumer demand starts to build up. However, certain anomalies in the tax regime need to be corrected. One of them pertains to long-term gains on bonds. On indirect taxes, not increasing custom duties on any new item would keep supply chains stable.
Fintech firms have been the glamour boys of stock markets in 2021-22. Their contribution to financial inclusion, induction of technology in the financial sector and easing of transactions for common citizens has been exemplary. But as their balance sheets grow large, it’s important that regulatory arbitrage between regulated entities and fintech firms is reduced. This is the regulator’s job, but a policy direction in the budget would reduce risk perceptions.
Disinvestment is an important part of the reform process. Air India’s sale has given a tremendous tail wind to the privatization programme. This year, one would be looking for further steps towards the sale of some public sector banks and central public sector units, as also of minority stakes. I see potential to raise up to ₹3 trillion in 2022-23.
The last two years have seen a large expansion in the borrowing of governments, both central and state. With rates likely to go up, we need to avoid the ‘crowding out’ effect that such borrowing inevitably causes. Growth calls for investment. The private-investment cycle will kick in once the fiscal deficit is contained and enough space is left for debt seekers from the private sector. That calls for defining a glide path for a return to tighter fiscal-deficit targets.
Atanu Chakraborty is chairman. HDFC Bank Ltd
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