Budget 2020-21: Beyond palliatives, the core structural issues that dog the economy need to be addressed.
By Ananth Narayan
Budget 2020-21: Given the slowdown in the economy, some were hoping for an additional demand stimulus from Saturday’s Budget. However, finance minister Nirmala Sitharaman had very little room for manoeuvre. Between ambitious tax collection targets, the corporate tax rate cut, continued disappointment on GST collections and shortfall in disinvestments, the fiscal deficit for FY20 could exceed the 3.3% of GDP target by as much as 1.6% of GDP. Also, much of our fiscal deficit goes into regular expenditures, rather than productive investments. In this context, any additional stimulus would only worsen the quality and extent of the fiscal balance.
While staying away from additional stimulus, the FM ensured that existing spending was not restrained. She chose to fully exercise the “escape clause” of the Fiscal Responsibility and Budget Management Act (FRBM), and revised the fiscal deficit target for FY20 up by the maximum allowed 0.5% of GDP to 3.8%. She also transparently acknowledged that an additional 0.8% of GDP of deficit will be pushed downstream into government-owned enterprises.
Again exercising the escape clause, she has set the fiscal deficit target for FY21 at 3.5% of GDP, higher than the 3.0% of GDP mandated by FRBM. However, the trend of having additional fiscal deficits pushed into state-run enterprises will continue into FY21 as well.
Even as we seek more government spending, we must recognise that the government is already providing much stimulus, supported by the RBI and MPC through rate cuts and bond purchases. The economic painkiller of print and spend is already being administered.
Beyond palliatives, the core structural issues that dog the economy need to be addressed. Our banks and NBFCs are in no position to support credit and economic growth, many other sectors such as power, telecom, real estate and construction face severe issues. To unlock our true potential around Make in India and Assemble in India, deep factor reforms are necessary.
To be fair, much has progressed on these fronts. Banks have been recapitalised and consolidated, NBFCs have been offered partial credit guarantees, there is progress on stressed asset resolutions, corporate tax rates have been cut, and labour laws are being simplified. In this Budget, steps have been taken to facilitate inclusion of Indian debt into global bond indices, which should bring in stable long-term capital into the country. Support to NBFCs continues, even as the government progresses on meaningful disinvestments. In her long Budget speech, many other positive steps have been described.
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However, we need to move beyond incremental reforms. The issues that banks and NBFCs face are severe — perhaps we need a more dramatic one-time resolution plan for the overhang of NPAs through a bad bank or a Troubled Asset Relief Program (TARP), alongside deep financial sector reforms such as those recommended by the PJ Nayak committee. Similarly, radical factor reforms in land, labour and ease of doing business may need to be provided in at least designated special economic zones, to attract sizeable investments into manufacturing.
The government is already providing a fair amount of fiscal stimulus to the economy, aided by a well coordinated monetary response from the RBI. Perhaps we now need more aggressive reforms to resolve the structural issues that confront us, to restart the dormant cycle of investment and growth.
The writer is Professor-Finance, SPJIMR