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Budget alone can’t push recovery

The business environment needs to be helpful so that the informal sector can recover and create jobs

However, all of this—PLI schemes and asset monetisation—won’t be enough to give the economy the push it needs.
One must acknowledge that finance minister, Nirmala Sitharaman, does not have much fiscal room to spend too much on welfare schemes and employment programmes.

Although the economic recovery has been uneven and growth is expected to slow in the second half of FY23, expectations from the finance minister are tempered. One reason for this is that the corporate sector is pretty much back on track; for large companies, the problems now revolve around a shortage of inputs and commodity inflation. To be sure, there are several sectors that have been affected by the pandemic. But, by and large, it is the informal sector that has been badly bruised and not recovered. One must acknowledge that finance minister, Nirmala Sitharaman, does not have much fiscal room to spend too much on welfare schemes and employment programmes. A repeat of the 30%+ jump in tax collections would be difficult on a high base, lower wholesale inflation and the cuts on fuel taxes. Taxes are tipped to grow at a more modest 11-12% next year and nominal GDP too will decelerate to around 12-13%. Also, if the LIC disinvestment goes through by March, the revenues from disinvestments could be a lot smaller next year. With non-discretionary spends at a high 50%, the government is expected to raise the capex outlay by 15-16%. However, all of this—PLI schemes and asset monetisation—won’t be enough to give the economy the push it needs.

What needs to be done—and this is beyond the budget—is to ensure the business environment is a far more friendly one in which policies and tax laws are not only stable but reasonable. That, then, should persuade businessmen to risk capital in projects that can be funded by lending institutions like the DFI, NIIF and others. Critically, the conditions on the ground—for small businessmen in particular—need to be improved, so that they are encouraged to set up shop. A huge swathe of small businesspeople is looking for some basic facilities. At a time when unemployment is running high and it is clear the capital expenditure by the government alone can’t create the number of jobs needed, private entrepreneurship needs a boost. By doing away with the numerous clearances and approvals—to be sure, most of these are given at the state-level—the ease of doing business can improve. The taxman must be ordered not to harass small businessmen or terrorise them; let them focus on the big fish that get away all too easily. If small businesses are supported, it would do away the need for welfare schemes. The number of start-ups is evidence of the entrepreneurial talent in the country. The opportunities lie not only in digital or technology-oriented businesses; other enterprises can be encouraged. Most importantly, the larger banks must be pushed to lend; they are taking the easy way out by simply creating secured retail assets and staying away from even minimum risk when it comes to MSMEs. The MSME sector needs a boost, especially the very small units, and the government’s ECLGS—a very good scheme—must be supported by additional bank credit. It can’t only be SIDBI and NABARD that take on the responsibility of lending to small units; banks must do their bit. It is a shame when owners, running small operations, are unable to access loans of 50,000 or1 lakh. Banks can partner digital lenders who are reaching out to these borrowers.

Unless the informal sector that employs 80% of the workforce (half of this works in agriculture) gets back on track, the inequality between the rich and the poor will only worsen. While the high public debt and widening trade deficit may call for fiscal prudence, in these difficult times the government should consider postponing fiscal consolidation for a year or two and stay with a fiscal deficit of 6.4-6.5% for FY23; compression could hurt recovery and tax collections.

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