Union Budget 2020 India: As and when credit conditions improve, the economy will revive. Attempts to accelerate the recovery by fiscal stimulus when financial accounts are in a dire state will not help.
Union Budget 2020 India: Economic policy-making has been described as driving in the rain, when neither the road ahead can be seen nor does the rear view mirror work. The Budget about to be introduced by Nirmala Sitharaman will be very much such an exercise, without any fault of hers.
As it is, budgets are a strange phenomenon. They are not so much an economic exercise as an accounting one. By established rules and procedures, a government has to present the financial accounts for the previous year and plans for the current one. Being an accounting exercise, two sides have to balance with the deficits or surpluses being listed, whether achieved or hoped for.
Despite the fuss made over budgets, they do not bear to be taken seriously beyond the first flush. A day later, the stale budget is no longer appetising. The economic effect of any budget will only be felt over the coming year. Ideally, any budget speech should dwell on the previous year’s exercise and evaluate its results.
The Budget about to be presented will face not only the problems of the fog surrounding any economic intelligence but will also have to regain the credibility of the exercise. Last year’s budget was surprisingly fragile and had to be supplemented by corrections of already declared policies and new initiatives. It was a very tentative exercise.
Having said that, one should ask whether that is not a better way of budgeting from an economic rather than a financial perspective. Economists would, or rather should, prefer fuzzy budgeting. Revenue and expenditure numbers should be given as ranges around a central figure, since it is inherently unknowable what the future will bring.
This year, especially, not only is the fog thicker, but the ground, too, is shifting and sinking. Given the fragility of even the statistics on GDP growth, the outcomes are pretty bad. If Aravind Subramanian, the former CEA is to be believed, even the 5% growth may be 2% or less. All the numbers for the economy, except perhaps the inflation numbers, are more unreliable than they normally are. The government’s most urgent task is to announce some policy designed to reestablish confidence in India’s economic statistics, perhaps by hiring outside experts.
But, whatever the growth number, it is one of the lowest in recent years. The economy is in a severe growth recession, having traversed a cycle of six years. India benefited from the spectacular growth cycle of 1998-2008, but it has not been able to sustain another such cycle. That cycle benefited from a fast growing global economy since India had opened up its own economy. Since 2008, western economies have slowed down spectacularly, from 3-4% growth to 0.5-1.5% growth. India has suffered due to this slowdown. It has also had the most spectacular crash in credit availability. Structural weaknesses of PSU banks, and the generally weak nature of contract enforcement discipline in the financial markets have become costlier as the economy gets more modern. The IBC was the first attempt to recognise that the financial markets are central to any economy and must be cleaned up. That effort has stalled, and the Indian economy is paying the price.
In earlier years, it was thought that the economy was driven by the government, which dragged the private economy along. Now, India has attained the stage where the economy is more like other capitalist economies, where the government can no longer drive it, but has to correct its course judiciously by using delicate, but effective, controls.
This means, that neither physical controls nor massive fiscal shocks are necessary, or desirable. The government needs to seriously rethink how the Indian economy in the last two decades has evolved to be a modern capitalist economy that needs sophisticated, but delicate controls. Old-style planning and intervention must be removed from the menu of policies.
Watch Video: What is Union Budget of India?
The government has tried, once again, to initiate divestment, but the internal opposition it faces (Hindu nationalists are as statist as the Leninists) has stalled the process. Even Air India is still draining resources. I do not wish it, but, perhaps, only a more serious collapse will bring sanity on this score. Policies of labour and land market reforms are similarly no-go areas despite the old idea that BJP was a traders’/bania party.
I do not have much hope of the budget. As and when credit conditions improve, the economy will revive. Attempts to accelerate the recovery by fiscal stimulus when financial accounts are in a dire state (if we were told the truth) will not help. The Indian economy needs a bold monetary and a timid fiscal policy. Any hope we will get it?
The writer is prominent economist and labour peer. Views are personal