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Lage Raho, Nirmala Behn!

Significant reforms take time, fortitude and consistency to implement

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The interesting thing about budget expectations is that there are hordes of them and, by definition, leave all those with expectations with a lingering feeling of yeh dil mange more  post the event ! 

It is best therefore to use the budget event as a mirror to gauge economic trajectory of the country and the government’s thinking  on the broad policy thrust it envisages is best for the nation. I will therefore leave sectional expectations to specific interest groups, and I will use this frame to share the big macro picture as I see it.  

I had written last year that the budget of 2021 could well be the 1991 moment for the NDA government post many false starts since 2014. It is worth recollecting that last year she had made three key fundamental changes to India’s economic trajectory: 

  • The remarkable feat of demonstrating the resolve to push second-generation reforms, fund growth and a definitive capital formation path through debt without additional resource generation from higher taxation, while remaining on a defined, credible fiscal glide path. 

  • Departure from  accounting sleight of hand in presenting the financials 

  • Acknowledgement that alternative means of non-tax financing of deficits is far more productive in releasing the  animal entrepreneurial spirits of its citizens and attracting investors in the context of a transparent, non-interventionist tax regime. 

The success of the FM in guiding the economy through a very difficult year punctuated by two covid waves led disruption, high global commodity prices, geo political moves of our neighbours, etc is evident in the economic statistics of government finances released recently. Resource mobilization, resource deployment in productive capital formation, tight control on the fiscal deficit, PMI expansion, record growth in goods exports outpacing most of the world including Taiwan, China, Korea and Vietnam, a steady currency, etc. – all this indicate the robust recovery in growth ( albeit still uneven ) and economic activity in tandem with tax collection efficiency. The only disappointment is the third year of missing divestment targets by a massive amount though LIC is still on track for the current year. The stock markets have recognized this well in advance and Indian equities have outperformed most of the global markets last year. 

Given the above, all I would say is that the FM should just continue on the path she chalked out last year. She must resist pressures from varied interests and  not tinker with what is not broken.  

Within this overall framework if I were to look at broadening  the government’s policy initiatives they would be in the areas of infrastructure financing, cost competitiveness of our exports and the rural economy. 

The National Infrastructure Pipeline of INR 110 Lakh crore is one of the key pillars for growth and the funding for which will require long term capital. Whilst asset recycling of domestic assets through the National Monetization Pipeline of INR 6 Lakh crore is envisaged, most of the funding today is done through banks with a much shorter liability profile. We do not need another ILFS due to asset liability mismatches, and thus must take the right regulatory measures to attract overseas long term infrastructure investors. Domestically, pension funds must be encouraged in India with sops for new contributors  to increase penetration as these are ideal for such long term financing globally. Our penetration is a mere 14% of GDP vs. 50% to 100% in developed economies. Inclusion of contractual workers, MSMEs, Anganwadi workers, etc  will have multiple social benefits too apart from a means of financing our infrastructure. Furthermore, investment restrictions must be calibrated to replace compulsory investments in government securities and corporate debt which add upto 80% of investible resources. Mature economies have about half this amount with the rest in equities including long term infrastructure assets. There is also scope for rationalizing the tax structure for sovereign funds and foreign pension funds which hold back large scale flows we need from this category in our capital starved economy. 

Cost competiveness has traditionally been a factor which has inhibited our non software exports for decades. Whilst the 1991 reforms addressed many of these, we have been taking steps to implement creeping protectionism last few years which ultimately destroys competitiveness. The factors of production ( land, labor and capital) are all politically intricate subjects and are the core reason for our lack of competitiveness. Whilst PLIs address certain issues, the formation of economic parks and SEZs with their own local laws will help in addressing these issues in a localized manner which will generate employment  and produce goods at internationally competitive factors of production. This will also be politically acceptable to most for the obvious benefits rather than a nation wide policy in a country as diverse as India. 

I believe that the rural economy is the bedrock of this country and can immensely  progress through targeted interventions by the private sector. The wholly unnecessary setback to the farm laws must be reversed  through a new scheme which is politically acceptable and is debated openly in parliament.  

The above three policy imperatives would have the additional benefit of taking some fundamental steps to reduce the growing economic disparity which will impede sustainability of economic progress we will make over time. India is amongst the most unequal countries in the world with the top 10% garnering 57% of the national income and the bottom 50% only 13 % - this jaw has widened in the last decade with a 20x disparity on an average basis. 

Significant reforms take time, fortitude and  consistency to implement before results are evident. India is on the right track after a long while  – at least on the economy  - and I hope the path of economic consistency will be maintained through a calibrated fiscal consolidation path, an investment led growth and incremental resource mobilization through non tax means like divestment and asset mobilization. 

Important elections are round the corner and competitive populism can potentially compel the FM to divert from the path of economic consistency which is delivering results. She will need all her leadership skills to stay the course. Aristotle explained more than 2,000 years ago the concepts of “techne” (craft), “episteme” (science) and “phronesis” (ethical judgement) as the three distinct types of contrasting knowledge skills required to solve the most complex problems. The finance minister has demonstrated the latter last year as a capital allocator and policymaker: ethical judgement, perspective and wisdom required when competing factors are at play, multiple options are possible and the answer is not absolute. 

The author is a Sloan Fellow of the London Business School, non executive director, and an advisor to chairmen, of corporate boards.

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.


Prabal Basu Roy

A Sloan Fellow from the London Business School, Director and Advisor to Chairmen of corporate boards, the author has formerly been a Group CFO in various companies.

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