By Anil K Sood
The finance minister and her team have the unenviable task of preparing a budget that balances long- as well as the short-term needs of the economy. The Indian economy has been experiencing a serious slowdown since Q4 of fiscal year 2017-18, when the quarterly GDP growth peaked at 8.1%. Gross capital formation is yet to recover from its most recent peak of 32.6% during the fiscal year 2014-15. The pandemic has caused the economic activity to collapse, resulting in India becoming one of the worst affected emerging and developing economies during 2020.
As a result of a prolonged slowdown, followed by a collapse, India’s ability to invest and grow stands compromised. As we know, the household savings rate has been declining, employment level and workforce participation levels too have been declining and business (outside of like information technology, private sector banks, etc.) has lost capital or the margins have been stagnant for many years. While the government expenditure has been holding up, the government has not had the courage to invest to the extent needed for supporting investment and consumption growth. RBI’s survey shows that household and business confidence is still at its lowest level in years.
In such a situation, government expenditure is the only way to provide a trigger for confidence to come back, which is necessary to accelerate growth in household and business investment and consumption.
During a recent visit, Dr Gita Gopinath too suggested that “the fiscal policy must remain accommodative in the near term” in the Indian context. Since there is a global consensus about letting government debt and fiscal deficits be at higher levels, I don’t expect the financial markets to react negatively. In any case, a lower rate or higher growth has the same impact on asset valuations. Financial repression, by forcing the rates to be lower, is at best a solution for a few quarters and not years.
I would, therefore, urge the government to use this budget to raise the level as well as quality of expenditure, without worrying about inflation or the level of government indebtedness. The current bout of inflation is largely driven by increase in global commodity prices, increase in taxes on petrol and diesel and the pricing power being exercised by large corporations in some sectors. They will run their course during the next quarters. I expect the commodity prices to moderate once global liquidity starts tightening and the Fed starts raising rates. Large businesses will raise prices only to a point where volumes don’t start coming down.
We need the government to invest in short-medium gestation and high-value adding economic and social infrastructure, where the risk of investment is with the government and not the private sector. Private sector is still struggling to raise the required capital. Healthcare, transport, and logistics infrastructure in urban and rural areas is the most appropriate choice at this stage. I would strongly argue for direct government investment using the EPC model and not public-private partnership mode, as the private sector infrastructure firms still don’t have sufficient risk-capital with them. We can always monetize these assets a few years later, if required.
I would also like the budget to link all the PLI schemes to productivity and value-addition and not just value of production. A turnover linked incentive in areas where there is no demand problem encourages lazy manufacturing, e.g., assembly of simple products like mobile phones and other low value-adding consumer products. A productivity and value-addition linked incentive would be relevant even after the household investment and consumption cycle is back on track.
(The author is professor and co-founder at the Institute for Advanced Studies in Complex Choices and was Professor of Finance at the Administrative Staff College of India. Views expressed are personal and do not reflect the official position or policy of the Financial Express Online.)
