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The Upcoming Budget: The Hyped Up Expectations Will Hurt Us All

Nirmala Sitharaman must not be set up for failure by unrealistic expectations in dealing with India’s most serious economic challenge post liberalisation

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There is significant hype in the media propelled by anchors and “bhakt” economists on the upcoming budget. In fact one such economist from across our shores actually writes that the massive election mandate will transform India to an Asian Tiger thereby implying a 10% GDP growth p.a. for the next 10 years ! 

Whilst we all live on hope, a dose  of realism is necessary even at the cost of being branded a pessimist – or worse. To be an Asian Tiger we need to be globally competitive, and as long we remain grossly  uncompetitive on the fundamental economic inputs of land, labor and capital such hopes cannot translate to reality. PM Modi withdrew the sensitive land reforms legislation thrice in 2015-16 and, though the NDA will have majority in the Rajya Sabha by 1920-21, I do not envisage any meaningful reforms in both the highly politically sensitive issues of land and labor (including land acquisition and exit policy). The RS majority will be used for far more politically popular, and electorally rewarding, legislations including those on Kashmir, NRC, uniform civil code, etc. which will cement the ultimate vision of a strong Hindu Rasthra. All important issues for India but  without being potentially unpopular like the hard economic reforms on land and labor.

Such hype tends to totally overlook the experience of other emerging economies ( eg : Brazil, South Africa, etc.)  who are caught in the “middle income trap” which the World Bank defines as per capita income stuck between $1000 to $ 10000 p.a. India is roughly at $ 3000 pa. It has significant advantages over many  countries - whose growth out of this trap is hampered by  resource driven, capital intensive models of economic development - by which it can migrate to high growth based on high productivity and innovation. But this will need investments in infrastructure and in reforming the education system which encourages creativity and scientific and technological innovation which lends itself back to viable commercial exploitation.  Are we anywhere close to this paradigm in reformist thinking ? And do we have resources allocated to such activity as a sustained program ?

The highly populist interim budget presented before the elections has now placed us in a fiscal bind with the fiscal slippage almost certainly drifting towards the 4% range by the year end. This does not include the impact of following the slippery path of the UPA which the BJP has chosen for itself  :  namely resorting  to large off balance sheet funding (eg : PSUs like FCI and NHAI)  and financial engineering ( bailout of sick institutions through LIC and ONGC, inter PSU amalgamation disguised as divestment ) to window dress financial statements. Whilst some fiscal slippage in times of serious economic downturn would be necessary, it is the utilization which remains the key. Capital formation and education would obviously be productive ; however, thus far significant amounts have been channelized towards revenue expenditure on subsidies, salaries, interest payments, etc.

For example, the farm sector subsidies in the interim budget is in perpetuity and will cost the nation Rs. 750,000 crores of subsidy over the next ten years. Would this not have been more judiciously  spent if, instead of planning for a permanent dole,  fundamental and comprehensive reforms in the agricultural sector were outlined ? The FM can still retrieve the situation by pushing fundamental reforms in agri trade, logistics chain including aggregation of produce and storage, dismantling the outdated mandi system, etc. Immediate income support has now become necessary as these sort of core reforms  have been ignored on the altar of populism over the last many years. 

The competing demands of the economy are many : infrastructure, skill development, education, health and now safety nets for various sections of the society. The roadmap to fiscal priorities is, therefore, a must which needs intelligent trade offs as not all will be achievable or sustainable. This blue print with substantive reforms to fundamentally seek  solutions to  our core growing  fiscal problems has been missing from past budgets and I hope this one will be different. Apart from buying some time, applying band aids has been the mantra and these have limited utility in cases of sustained  hemorrhage  !

Due to the fiscal constraints we find ourselves in due to the expectedly lower revenues, a large dependence for resources will now depend on the outcome of the RBI’s capital transfer mechanism presently being deliberated by the Bimal Jalan committee. This by itself indicates the level of the crisis in the economic system where we desperately need accelerated access to reserves built over years ; not to mention the impending NBFC led dislocation in the credit markets post the ILFS crisis. Indications are that we are almost certainly headed towards a regime of simultaneously loosening monetary and fiscal policy. The last time this experiment was conducted in  2009 post the global crisis it resulted in a disaster due to our inherent vulnerability to external shocks ( the Dollar strengthened from Rs. 48 to Rs. 65) : it was Raghu Ram Rajan who stemmed the outflow and the lack of confidence in India post his appointment in 2013 as the RBI governor by a sustained series of fundamental innovations and hard steps to discipline the system - and for which he had to pay the price! 

The new FM is an able, determined administrator of high integrity but not an economist : given the gravity of our situation, and the global backdrop,  I would have thought the PM would have done justice by appointing a hard core professional for this ministry like he did for External Affairs or Narasimha Rao had done with Manmohan Singh in 1991.  The more fundamental question, though, remains : why do renowned professionals leave for “personal reasons” without completing their terms ? Urjit Patel, Viral Acharya, Arvind Panagariya, Arvind  Subramaniam, etc., to name a few. Whilst the trolls can be ignored for  venting their venom, this is a serious issue which impacts our national credibility of being a liberal democracy on the path of economic consistency. In this ominous situation,  the FM would have significantly benefited from the diversity of opinion of  world class professionals as it would have certainly provided her with well debated, and innovative, solution choices for the larger good of the nation at this critical juncture.

The stark reality, though,  is that the  BJP is increasingly becoming a left of center party - indistinguishable from the Congress on economic policy - notwithstanding it’s   talk of privatisation, minimum government, maximum governance, etc. 

And, as this election has proven, the voter has given primacy to Hindu nationalism , welfarism and incremental reforms over hard economic issues. Hence, the painful path of big bang, core economic reforms seems unlikely, and politically unnecessary. We will continue to grow at the steady trot our demography dictates – but becoming an Asian Tiger in next five years is highly unlikely, though I would be the happiest to be proven wrong.

The markets though will continue to party – and worry about the hangover later !

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Union budget 2019-20

Prabal Basu Roy

The author is a Sloan fellow of the London Business School and a chartered accountant. He has previously been a director/ Group CFO in various companies. He now manages a PE fund and advises startups / corporates.

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