Short on stimulus, long on reform

Traditionally, the presentation of the Central government’s annual budget is an occasion to conjure up the image of the mythical wish-fulfilling tree for an average Indian. To some, the budget is expected to deliver what dreams are made of. It was no different this time. However, there was some serious and urgent business to do by the government in its second budget in about seven months. A widely-shared view has been gaining ground for a time that the budget for 2020-21 needs to spell out a clear and coherent strategy to tackle the abrupt slowdown of the Indian economy in 2019, although incipient signs of this have been available since 2017.

The equity market has given a thumbs down, falling by a hefty 900 points, as it did not find the proposals providing an adequate stimulus to investment and consumption needed for a quick growth turnaround. Be that as it may, it is still apposite to evaluate the budget by applying a dispassionate and objective framework and yardstick. Since the current dismal growth performance has provenance in both cyclical and structural factors, a useful approach in this regard would be to see how the budget addresses them.

Counter-cyclical measures

As for fresh investment, the budget does not reveal any big capital expenditure proposal, apart from the ones which have already been announced like the Rs. 100 lakh crore 5-year infra spending plan, for which a pipeline of 6500 projects have been identified or the Rs. 25000 crore corpus for salvaging stalled but viable housing projects. From the tone and tenor of the Economic Survey and the budget speech it is apparent that the government’s priority is to take those policy measures that will clear the way for an early commencement of the next cycle of vigorous private investment leading to, among other things, job creation. For spurring consumption, it is making available Rs 40,000 crores in the hands of taxpayers, which is about 2.4% of the net tax receipts in 2020-21. Both the tax-payers and the equity market expected more tax cuts, and, hence, it will continue to be debated for a good while if this amount was too small to have any meaningful impact on consumption. However, an aggregate outlay of over Rs.20 lakh crore for agriculture and rural development will be positive for rural income and consumption.   

The sufficiency or otherwise of the budget measures needs to be understood from a global context as well. Signs of vulnerability of the global economy are writ large: as per IMF’s estimate, the global growth in 2019 was 3% - the lowest rate since 2008-2009. The impact of the corona virus will mean an added headwind this year. In India, the countercyclical monetary easing that began in February 2019 has most possibly come to an end. By RBI’s own admission, more structural reforms are now necessary.

The sufficiency or otherwise of the budget measures needs to be understood from a global context as well. Signs of vulnerability of the global economy are writ large: as per IMF’s estimate, the global growth in 2019 was 3% - the lowest rate since 2008-2009. The impact of the corona virus will mean an added headwind this year. The World Economic Forum in its Global Risk Report 2020 has observed: ‘The global economy is at risk of stagnation. Rising trade barriers, lower investment and high debt are straining economies around the world. The margins for monetary and fiscal stimuli are narrower than before the 2008–2009 financial crisis, creating uncertainty about how well countercyclical policies will work.’ In India, the countercyclical monetary easing that began in February 2019 has most possibly come to an end. By RBI’s own admission, more structural reforms are now necessary.

Structural reforms

The government in the budget documents has cited the introduction of IBC and GST as the two structural reforms accomplished. Both these path-breaking reforms are in their early years, and going forward they are likely to enhance the long-term growth potential of the economy. But evidently, there are quite a few remaining major structural bottlenecks. The budget addresses a good number of them, the quality of which could be roughly gauged by taking a look at the policy measures for the rural agricultural economy and human resources development.  While the contribution of agriculture and allied activities in the GDP is close to 15%, roughly about 50% of the country’s population is dependent on this sector. The other structural feature of agriculture is that productivity is low - crop yields in India have been 20-40% less than their global averages for a long time now.  

By 2030, India will have the largest working-age population globally. But the fact remains that the quality of education and skillsets of young graduates, barring those from a handful of institutions, continue to be poor by any standard. The budget proposals for a bigger role for private sector together with emphasis on skill development are welcome, but the outlay for human resource development at Rs. 99311 crore is too meagre. 

The downside of a disproportionate number of people being dependent on agriculture has been brought into a sharp relief of late: the burgeoning construction activities in urban areas in the recent decades provided employment to a large number of persons from the rural households, sustaining aggregate demand and consumption in the economy and also spurring retail lending in the rural and semi-urban areas. Come the liquidity crunch for NBFCs in the wake of IL&FS default and the large-scale abandonment of housing projects, the income of rural households dropped and there are no signs as yet of its reversal. The budget has taken a number of steps to augment their off-crop income in a sustainable way, viz. solar power generation and fish-farming. One reason for low crop yield in India is its relatively small plot size. While the proposal for enactment of laws by the States to permit leasing of agricultural lands and contract farming could be a solution in this regard, but it is doubtful how many States will have the political will to do this.

We have been told that by 2030, India will have the largest working-age population globally. But the fact remains that the quality of education and skillsets of young graduates, barring those from a handful of institutions, continue to be poor by any standard. The budget proposals for a bigger role for private sector together with emphasis on skill development are welcome, but the outlay for human resource development at Rs. 99311 crore is too meagre, keeping in mind the preparations needed in the lead up to 2030.   

Financial sector reform

The Economic Survey has prepared a good analysis of the performance of PSU banks and the problems afflicting NBFCs. The significant risk aversion currently evinced by PSU banks, despite their comfortable liquidity position should not come as a surprise in the light of a very insightful empirical research done at RBI a few years back, establishing the behavioural fact that at times of high NPAs, banks are averse to making fresh loans. While one would like to await the announcement of measures for enhancing the governance, professionalism and efficiency of PSU banks, as promised in the budget, it must be pointed out that nothing but a set of thoroughgoing reform measures giving full autonomy to their boards in matters of strategy and business operations, including hiring of and fixing compensation for staff at all levels will work. The half-hearted and half-baked measures of the past have not been meaningful.                     

The proposal to amend the Banking Regulation Act to give more oversight powers to RBI in respect of cooperative banks is welcome, so is the step to allow non-resident investors greater access to government securities and corporate bonds. The latter measure will pave the way for Indian debt securities to be included in global indices. A long overdue reform is finally happening – enactment of a legislation to enable the netting of financial contracts.

This budget, despite being hefty and interspersed with too many quotes is qualitatively better than the previous one, which will perhaps go down in history for making the most unrealistic revenue and expenditure projections.  The net revenue receipts in 2020-21 budget is only 9.8% higher than the revised estimate for 2019-20, while the corresponding rise in the previous budget was a whopping 26.4%. In the short run, if the budget proposals and the follow up measures can restore the trust of the investors and the consumers in the economy and in the government, the exercise will be worth the formidable efforts that have gone into it. As the Economic Survey has indicated, the integration of the Invisible Hand with the Hand of Trust is critical.      

(Himadri Bhattacharya is a former Central banker and consultant to the IMF)