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GS Paper: GS3-03.Government Budgeting

  • The Budget unshackles India’s economic growth story

    The article highlights the three key feature of the Budget which makes it historic.

    1) Disinvestment

    • Budget 2021-22 will begin the process of the withdrawal of the state from business.
    • Bank nationalisation in 1969 signalled a new era — just more than 50 years later, India has changed course for the better.
    • The budget signals that the process towards the goal of greater economic freedom, and faster and more equitable economic development, and maturity, has well and truly begun.

    2) Changed role of fiscal deficit in economic policy

    • Many of us forgot the original meaning of fiscal deficits and their importance.
    • When there is an unemployment, a considerable portion of deficit financing can go towards growth, rather than inflation.
    • The relegation of the fiscal deficit to a secondary role in economic policy was the second big departure from a conventional budget.
    • The conventional argument was that fiscal deficit was something to really worry about, hence taxes must be raised to keep the deficit within limits.
    • There was serious talk of a COVID cess, a wealth tax, and increase in the tax rate for the rich.
    • There is no increase in tax rates to increases tax revenue.
    • Rather, the finance minister took the extra-bold step of reducing corporate taxes in September 2019.
    • India awaits a comprehensive reform of the Direct Tax Code. It did not happen. But the stage is set for such a reform.

    3) Transparency in fiscal math

    • If the government borrows from the Food Corporation of India (to finance MSP purchases, what else), it will now appear as part of expenditures and as part of the deficit.
    • Also, the GDP growth estimates for 2021-22, forecasted at 14.5 per cent (nominal).
    • Normally, finance ministers in India tend to over-estimate, and most often, fall short.
    • Budget 2021-22 might be the first to significantly exceed the forecasts.

    Criticism of the budget

    • One of the issues with the budget cited by the critics is that its forecasts would be in error because of problems of “execution and implementation”.

    Conclusion

    With many firsts, it is a budget that lays the foundation for sustainable recovery in GDP growth and welfare improvement.

  • What are Government Securities (G-Secs)?

    The RBI has said that it would allow retail investors and other small investors direct access to its government securities trading platform.

    What are G-Secs?

    • These are debt instruments issued by the government to borrow money.
    • The two key categories are:
    1. Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
    2. Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years

    Note: T-Bills are issued only by the central government, and the interest on them is determined by market forces.

    Why G-Secs?

    • Like bank fixed deposits, g-secs are not tax-free.
    • They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
    • However, they are not completely risk-free, since they are subject to fluctuations in interest rates.
    • Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

    Who can invest in Corporate Bonds and Government Securities?

    • Pension Funds: Pension funds can also invest in both corporate bonds and government securities to ensure long-term stability and growth in their investment portfolio. .
    • Retail Investors: Retail investors, including individual investors, can invest in both corporate bonds and government securities.
    • Insurance Companies: Insurance companies can invest in both corporate bonds and government securities as part of their investment portfolio. The search results indicate that insurance companies often invest in a mix of low-risk and high-yield assets, with government securities providing lower risk and corporate bonds offering higher returns.

    Retail investors and G-Secs

    • Small investors can invest indirectly in g-secs by buying mutual funds or through certain policies issued by life insurance firms.
    • To encourage direct investment, the government and RBI have taken several steps in recent years.
    • Retail investors are allowed to place non-competitive bids in auctions of government bonds through their Demat accounts.
    • Stock exchanges act as aggregators and facilitators of retail bids.

    Try this PYQ:

    Consider the following statements:

    1. The Reserve Bank of India manages and services the Government of India Securities but not any State Government Securities.
    2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
    3. Treasury bills offer are issued at a discount from the par value.

    Which of the statements given above is/are correct?

    (a) 1 and 2 only

    (b) 3 Only

    (c) 2 and 3 only

    (d) 1, 2 and 3

    Why the current proposal?

    • The g-sec market is dominated by institutional investors such as banks, mutual funds, and insurance companies. These entities trade in lot sizes of Rs 5 crore or more.
    • So, there is no liquidity in the secondary market for small investors who would want to trade in smaller lot sizes.
    • In other words, there is no easy way for them to exit their investments.
    • Thus, currently, direct g-secs trading is not popular among retail investors.

    What will the current proposal do?

    • The details are not out yet. However, the RBI’s intention is to make the whole process of g-sec trading smoother for small investors.
    • By allowing people to open accounts in RBI’s e-kuber system, it is hoping to create a market of small investors who will invest in these instruments.

    Why such a move?

    • The RBI is the debt manager for the government.
    • In the forthcoming financial year, the government plans to borrow Rs 12 lakh crore from the market.
    • When the government demands so much money, the price of money (i.e., the interest rate) will move up.
    • It is in the government’s and RBI’s interest to bring this down.
    • That can only happen by broadening the base of investors and making it easier for them to buy g-secs.

  • The reason that India cannot afford to go on a debt binge

    The article discusses the challenges associated with the Budget with a high fiscal deficit.

    Change in government’s stance

    • India’s economy has suffered more than most from the covid pandemic and so have its people.
    • Its economic contraction has put pressure on its government, like so many others, to respond.
    • Until this week, government’s response had been relatively restrained.
    • The government implied that any welfare-promoting and growth-enhancing measures had to stand on a solid macro-economic foundation.
    • The federal budget for the next financial year, 2021-22, with the fiscal deficit for the current fiscal at 9.5% of gross domestic product (GDP) has changed that optimistic narrative.
    • The government has effectively abandoned its long-term commitment to bring the deficit down to close to 3% of GDP, pitching instead for a gentle descent to 4.5%—six years from now.

    Implications of high fiscal deficit

    • Once the covid pandemic retreats, India might end up with a debt-to-GDP ratio of about 90%, compared to the low 70s at present.
    • It would be saddled with a permanently elevated fiscal deficit and a financial system bogged down by high levels of bad debt.
    • Consumer price inflation has topped the Reserve Bank of India’s target zone of 2%-6% since the covid lockdown began last year.
    • Unlike the US or China, countries in India’s position—which have neither a reserve currency nor strong growth momentum—cannot grow rapidly while exploding their debt.
    • They can’t afford to ignore rating agencies because of their supposed bias, or cock a snook at bond markets and just run the currency presses instead.
    • They need to grow in order to reduce their debt. That’s a very different dynamic.
    • India isn’t so attractive that it can expect vast sums of investment to arrive even if its macro-economic numbers look bad and its sovereign rating is junk.
    • We don’t have a history of deflation, we aren’t hitting the zero lower bound.
    • It’s quite the opposite; we have an economy prone to sustained high inflation.
    • India is not in a position in which it could build really productive assets using sustained deficit.
    • This is still a developing economy, which especially in bad times should tread carefully rather than throw caution to the winds.

    Rationale behind high spending

    • The government is hoping that increased spending will help India grow out of this predicament.
    • The only way India can pull itself out of this jam is if private investment pours into the country, financing projects that push up the country’s potential growth rate.
    • Yet the government, already monopolizing domestic financial savings, seems to want to go to war with global markets as well.

    Consider the question “Fiscal deficit figures for FY21 marks the end of India’s departure from the path of fiscal consolidation. Discuss the challenges posed by such high fiscal deficit to the Indian economy.

    Conclusion

    India’s greatest strength had been his commitment to fiscal responsibility. The path of fiscal adventurism could end up leaving India’s macroeconomy vulnerable.

  • Government set for fiscal push, RBI needs to do more

    The article analyses the key features of the Union Budget, including the increase in overall expenditure and jump in capital expenditure in FY22.

    Explaining the Rs 4.1 lakh crore jump in expenditure in FY21

    • The budget has moved clearly from off-balance-sheet funding [borrowing by FCI and arrears of fertiliser subsidy] to headline-deficit funding.
    • That possibly explains the surge in fiscal deficit in the current fiscal at 9.5 per cent of GDP.
    • However, by excluding such off-balance-sheet funding, the headline-fiscal deficit declines to 8.6 per cent of GDP. 
    • A closer look at the food subsidy, juxtaposed with outstanding FCI liabilities shows that Rs 1.2 lakh crore (0.6 per cent of the GDP) is a pure accounting shift, while the rest Rs 1.9 lakh crore is new spending this fiscal.
    • Hence, the incremental spending in FY21 comes to around Rs 2.9 lakh crore (net of Rs 1.2 lakh crore/ 1.5 per cent of the GDP).
    • Interestingly, the government has also spent an additional Rs 62,638 crore on fertiliser subsidy, the entire amount of which has been front-loaded.

    Focus on capital expenditure in FY22

    • Increase in the expenditure in FY22 is noticeable as the pie has decisively shifted towards capital expenditure.
    • The budgeted raise in FY22 is 4.6 times larger than the trend increase in the last two decades. 
    • The proposed capital expenditure amounts to 3.4 per cent of the GDP if we also include allocation for capital expenditure for autonomous bodies.
    • Assuming an Incremental Capital Output Ratio (ICOR) of 4.5, one can expect a GDP growth contribution of 0.8 per cent on account of the capital expenditure.
    • The other number in the budget that deserves admiration is the significant decline in extra budgetary resources of the government and PSUs. All this augurs well even for rating agencies if we go by purely fiscal transparency as a rule.

    Steps to clean up NPAs in the banking sector

    • The most notable development in the financial system is announcement of setting up an Asset Reconstruction Company (ARC) and an Asset Management Company (AMC).
    • The approach is to set up an AMC, which in partnership with an ARC, takes over large stressed assets ( approximately Rs 3.5 lakh crore) spread across multiple banks that have a clear potential for turnaround.
    • An operational turnaround of the asset creates value for the overall system.
    • The AMC/AIF-led approach could enable a move towards true price discovery, consolidating debt into one single entity ensuring faster decision-making, freeing up blocked capital/funds and an operational turnaround of assets.
    • A better price discovery could be ensured by having an independent investment committee comprising of senior management professionals.

    Increase in FDI limit in insurance sector

    • The Union budget also has a proposal to increase the FDI limit in insurance companies to 74 per cent from the present 49 per cent, with Indian management control.
    • It is expected that fresh capital will bring a new wave in technical know-how, innovation, and new products to the advantage of consumers, pushing up insurance penetration in the country.
    • However, we must ensure that foreign investors become interested in the Indian insurance sector as the current FDI used limit is at 33.8 per cent in private insurers.

    Role of RBI

    • With the government set for a fiscal push, the baton has passed to the RBI.
    • Overall, monetary and fiscal policies need ideal co-ordination for macroeconomic management.
    • If the central bank pursues its monetary objectives by not accommodating debt financing in its strategy, the macroeconomic outcome may be worse for both the fiscal and monetary authorities, as well as for the economy.
    • Fortunately, the RBI and government have worked in perfect harmony during the pandemic.
    • As it continues, we can have a stable interest rate regime which will be rewarding for all, particularly the government.

    Conclusion

    The Union Budget for FY22 is a budget to consolidate (C), spend (S) and revive (R) and shows that the government is set for fiscal push. Now, the baton has passed to the RBI.

    Back2Basics: What Is the Incremental Capital Output Ratio (ICOR)?

    • The incremental capital output ratio (ICOR) is a frequently used tool that explains the relationship between the level of investment made in the economy and the consequent increase in the gross domestic product (GDP).
    • ICOR indicates the additional unit of capital or investment needed to produce an additional unit of output.

  • Economy needs much more than what Budget 2021 offers

    The article highlights the areas of economy for which the allocation in the Budget has either been kept unchanged or reduced, signaling the missed opportunity to revive the economy.

    Including the off-budget items

    • An important feature of the Budget is the transparency on including the off-budget items.
    • The step will result in cleaning up of the balance-sheet of the Food Corporation of India (FCI).
    • The FCI was saddled with a debt of Rs 3.75 lakh crore by the end of December 2020, a significant part of which is now paid by the government.
    • So is the case of the fertiliser subsidy for which the pending Rs 65,000 crore was cleared.

    What was the increase in expenditure due to pandemic

    • The total expenditure of the government in 2020-21 hardly increased compared to the pre-pandemic budget estimates (BE).
    • The total increase in revised estimates (RE) for 2020-21 is only Rs 33,000 crore, around 1 per cent more than what was budgeted.
    • The government did raise the expenditure on food subsidy, direct benefit transfer to Jan Dhan accounts (Rs 33,000 crore) and the increase in the Mahatma Gandhi National Rural Employment Guarantee (MGNREGA) (Rs 50,000 crore) and so on.
    • But it did so not by generating resources and expanding the fiscal deficit but by cutting down essential expenditure such as agriculture (Rs 18,000 crore), education (Rs 14,000 crore) and social welfare (Rs 14,000 crore).

    No increase in health budget

    • The Budget announced increase in the health budget to Rs 2.23 lakh crore.
    • This number was achieved by adding one-time expenditures on the vaccine, Finance Commission grants and inclusion of expenditure on drinking water, sanitation and nutrition.
    • However, the budget of the health ministry for 2021-21 is lower at Rs 74,602 crore compared to the revised estimates of Rs 82,445 crore for the current year.

    No increase in agriculture budget

    • Like in many other essential ministries, the agriculture ministry also witnessed a cut with estimates of 2021-22 lower by Rs 11,000 crore than last year.
    • Real investment in agriculture has been lower than 2013-14 for every year of this government.

    Lack of attention on employment generation in rural area

    • The lifeline provided by expenditure in rural areas on infrastructure creation and employment generation has either seen a decline in budgeted expenditure or remained stagnant.
    • The budget for the ministry of rural development is lower by Rs 66,000 crore compared to the RE of last year.
    • The MGNREGA budget of Rs 73,000 crore is barely enough to cover the increase in wages by 11 per cent announced in March.
    • It is only 1.8 per cent higher than the actual expenditure of 2019-20, but 52 per cent lower than the RE of last year.
    • Similarly, for the Pradhan Mantri Gram Sadak Yojna (PMGSY), the budget for 2021-22 has been cut by Rs 4,500 crore, not even enough to cover inflation between the two years.

    Consider the question “The Budget 2021-22 has been hailed for bringing in more transparency to the budgeting exerciese? Examine the context for this, how it will benefit the country?”

    Conclusion

    Estimates for next year point to missed opportunities to use fiscal measures to revive the ailing economy. Unlike the pandemic, where the arrival of vaccines has given hope, the ailing economy needs much more than this budget.

  • The Budget bids goodbye to fiscal orthodoxy

    A whopping fiscal deficit at 9.5% of GDP for FY21 highlights departure of India’s fiscal policy from the path of fiscal consolidation. The article highlights the issues related to such departure.

    Important departure

    • With its fiscal deficit at 9.5% of GDP for FY21 and 6.8% in FY22 Budget for 2021-22 seems to signal “spend like there is no tomorrow”.
    • For well over a decade-and-a-half, we have tried attaining deficit targets set out in the Fiscal Responsibility and Budget Management (FRBM) Act (2003).
    • In this Budget, target of FRBM Act has not been adhered to.
    • The Budget thus marks an important departure from one of the key tenets of the Washington Consensus that was based on macroeconomic stability.
    • In previous years, Medium Term Fiscal Policy cum Fiscal Strategy Statement would give the indicators for the past two years as well as the projections for the next two years.
    • In this year’s Budget, the yearly projections are missing.
    • The Finance Minister has promised to introduce an amendment to the FRBM Act to formalise the new targets.

    The theoretical basis for departure

    • The Economic Survey laid the groundwork for a departure from rigid adherence to fiscal consolidation. 
    • It has a quote from economist Olivier Blanchard, “If the interest rate paid by the government is less than the growth rate (IRGD), then the intertemporal budget constraint facing the government no longer binds.”
    • The “intertemporal budget constraint” means that any debt outstanding today must be offset by future primary surpluses.
    • The Survey argues that in India, the growth rate is higher than the interest rate most of the time. 
    • The Survey says that, in the current situation, expansionary fiscal policy will boost growth and cause debt to GDP ratios to be lower, not higher.

    Key concerns

    • An important factor for adhering to the fiscal constraint in the past was the fear that the rating agencies would downgrade India if total public debt crossed, say, 10%-11% of GDP.
    • That is a risk that cannot be wished away unless the rating agencies have decided to toe the IMF-World Bank line on fiscal deficits.
    • Another concern is that a large fiscal deficit can fuel a rise in inflation.
    • A third concern is that, with the tax to GDP ratio not rising as expected, the sale of public assets has become crucial to reduction in fiscal deficits in the years ahead. This is a high-risk strategy.
    • A large-scale privatisation almost always involves substantial FDI.
    • In South East Asia and Eastern Europe, privatisation of banks meant a large rise in foreign presence in the domestic economies.

    Consider the question “The Budget 2021-22 is characterised by its departure from the path of fiscal consolidation. Examine the theoretical basis for such departure. What are the key concerns?”

    Conclusion

    If the nation’s political economy came in the way of our meeting the FRBM targets, it is also likely to pose an obstacle to large-scale privatisation. A departure from fiscal orthodoxy is welcome. But the government needs to think of ways to make it more sustainable.

    Back2Basics: Interest Rate Growth Differential

      • A key indicator of an economy’s long-run debt sustainability is the differential between interest paid on government debt and the economy’s nominal growth rate.
      • When the cost of raising debt is lower than the gross domestic product (GDP) growth rate, public debt comes with low fiscal costs.
      • In such a situation, the debt-to-GDP ratio of the economy declines as debts are rolled over.

     

  • Despite some hits, the Budget has crucial misses

    The article highlights the key aspects of the budget and also mention the failure to address the challenge of employment and rising inequality.

    Significance of the Budget

    • At its simplest, is the government’s tentative income and expenditure statement.
    • At its broadest, the Budget is a pious statement of the government’s policy and ideological intentions.
    • It is also the government’s statement of how it seeks to tackle the immediate political (electoral) and economic challenges.

    Stepping up public investment and challenge of financing

    • The present Budget’s focus on stepping up public investment by 34.5% in the coming fiscal year (compared to the current year) is a welcome sign.
    • The government will borrow an additional ₹80,000 crore for the purpose in the next two months.
    • Realisation of these investments would crucially depend on tax revenue realisations, disinvestment proceeds, sale of rail and road assets and the government’s ability to raise resources from the market, without raising interest rates for the private sector.
    • There is no mention of the government’s recourse to debt monetisation.
    • While the investment intentions are evident, its financing efforts seem to have too many loose ends.

    Development Finance Institution

    • To deal with the poor industrial and infrastructure investment during the last decade the Budget proposed setting up of Development Finance Institution.
    • One of the reason for poor investment was a lack of long-term credit for infrastructure,which yields low rates of return spread over a long period of time.
    • Commercial banks, whose deposits are for short to medium term, find it difficult to lend for long term (more than five years) for the fear of maturity mismatch.
    • Moreover, as banks were laden with rising non-performing assets on account of poor corporate sector performance during the last decade.
    • Also,  most successful industrialising economies have relied on DFIs for providing long-term credit.

    Financing challenge DFI could face

    • Weakness of DFI lies in securing stable long-term, low cost sources of finance.
    • The proposed DFI will be financed by foreign portfolio investments (FPI), which is a cause for concern.
    • By definition, FPI represents short term inflows with exchange rate risks, while infrastructure investment is for long term whose revenues will be mostly in rupees.
    • Such an investment will inevitably lead to currency and maturity miss-match, raising cost of capital.
    • Hence, there is a need to consider alternative long-term sources, preferably from domestic sources, or international development agencies.

    Health infrastructure

    • A substantial annual fixed investment in improving urban sanitation, drinking water and sewage facilities, it is indeed a welcome step.
    • A lessons from rural Swachh Bharat Abhiyan is that  complementary facilities need to be constructed in a coordinated manner to maximise the effectiveness of such investments.

    No effort to address rising inequality

    • There is no targeted employment programme to alleviate the immediate crisis is a matter of concern.
    • There is no mention of the stupendous rise in economic inequality during just the last year.
    • While the poor lost their jobs and livelihoods in 2020, corporate India’s profits increased.
    • The Budget could have consider a special tax on the super-rich — as many countries are now mooting.

    Consider the question “What necessited the Development Finance Institution? Examine the challenge it would face in its functionig?”

    Conclusion

    In summary, if the capital expenditure plan outlined in the Budget speech is credible, and implemented with assured financial backing, it could revive the investment cycle. The proposed development bank for term lending for infrastructure is welcome, provided its sources of finance are cheap, long term and mostly domestic. Investments in urban public health infrastructure — sanitation, water supply and sewage — are in the right direction if implemented in a coordinated manner.

     

  • Bringing transparency in Budget in agri-food sector

    The article analyses the Union Budget and highlights the emphasis on transparency by showing the borrowing of the FCI and arrears of the fertiliser companies in the Budget.

    Transparency in food subsidy and arrears of fertiliser industry

    • Year after year, a substantial part of the food subsidy was being put under the carpet by increasing the Food Corporation of India’s (FCI) borrowings.
    • The amount had crossed Rs 3 lakh crore.
    • The revised estimate (RE) for FY 2020-21 is 3.66 times the budgeted figure, indicating that almost all borrowings of FCI have been cleared.
    • This is indeed a historic step towards introducing transparency in the Union Budget.
    • The Budget also cleared off the fertiliser industry’s arrears.
    • Against the budgeted figure of Rs 71,309 crore for FY 2020-21, the revised estimate is Rs 1,33,947 crore, an increase of Rs 62,638 crore.

    Neglect of R&D

    • From a policy perspective one must point to the huge bias towards subsidies as compared to investments, especially research and development.
    • The allocation for agri-R&D is a meagre Rs 8,514 crore in FY 2021-22 against a RE of Rs 7,762 crore in FY 2020-21.
    • The marginal returns in terms of agri-growth from expenditures on agri-R&D are almost five to 10 times higher than through subsidies.
    • India spends not even half of what a private global company like Bayer spends on agri-R&D — almost Rs 20,000 crore every year.
    • This is why growth momentum in agriculture remains subdued and India keeps spending on freebies with sub-optimal results.

    Subsidies needs a rethink

    1) Food subsidy

    • The FCI’s economic cost of rice is Rs 37/kg and of wheat about Rs 27/kg.
    • This economic cost is roughly 40 per cent higher than the procurement price.
    • This calls for giving the public distribution system’s beneficiaries the choice of direct cash transfers.
    • This could create a more diversified demand which, in turn, will support diversification in agriculture.
    • Further, in food subsidy, it is time to revise the issue prices for beneficiaries except for the antyodaya (most marginal) category.
    • Percentage of population covered by the food subsidy should be brought down to 40 per cent.

    2) Fertiliser subsidy

    • Massive subsidisation of urea, to the tune of almost 70 per cent of its cost, is leading to its sub-optimal usage.
    • It is time to move towards direct cash transfers to farmers based on a per hectare basis and free up prices of fertilisers.
    • This will help reduce leakages and imbalance in NPK (nitrogen, phosphorus, potassium) usage and lead to efficiency, equity and environmental sustainability.

    Consider the question “If one looks at India’s Union Budget, it is easy to notice huge bias towards subsidies and neglect of the research and development in agriculure in the allocation for agriculture sector. What are the implications of such bias?” 

    Conclusion

    Overall, the expenditure on agri-R&D needs to be doubled or even tripled in next three years, if growth in agriculture has to provide food security at a national level and subsidies on food and fertilisers need to be contained. At the same time, food subsidy and fertiliser subsidy needs rationalisation.

  • An overview of Economic Survey 2020-21

    The pandemic has been leaving its imprint various aspects of our lives and Economic Survey is no different. This year’s Economic Survey focuses on the recovery path of the economy disrupted by the pandemic. The article takes an overview of the survey and also mentions the missing areas.

    Focus on a recovery path

    • The Economic Survey analyses the broad trends at the macro level and the profiling of the initiatives across various economic activities.
    • This year, the Economic Survey focuses on the recovery path after initial derailment and the losses suffered by the Indian economy due to the pandemic.
    • The recovery is expected to follow a V-shaped path.
    • The Survey advocates countercyclical fiscal policies based on the premise that growth leads to debt sustainability.
    • The Survey brings together various relevant factors that have both a short and long-term impact on the economy and the budget.
    • This year’s Survey focuses on enhanced public healthcare spending and demonstrates how effective it has been in slashing out-of-pocket expenditures in the recent past.
    • It also shows the brilliant performance under the Pradhan Mantri Jan Arogya Yojana (PM-JAY) and the improved outcomes in states that have implemented the programme.
    • With focus on basic needs, the Survey has brought back national attention on the fundamental developmental paradigm.
    • The idea of analysing inequalities in times of recovery is a reassuring premise to move on with.

    Comparison with past Economic Surveys

    • If we consider the last two Economic Surveys, the introduction of new concepts and approaches has been quite evident.
    •  In the Survey for 2018-19, the idea of “nudge” helped provide recognition of the importance of social behaviour change for any policy to succeed.
    • This led to the adoption of transformative approach in the Swachh Bharat Mission and Beti Bachao Beti Padhao initiative that integrated behavioural insights.
    • Another powerful idea has been using technology to run and monitor welfare schemes.
    • The Economic Survey 2019-20 talked overwhelmingly about the importance of wealth creation, entrepreneurship, and financial markets in the economic development.

    What the Survey misses

    • The Survey should have focussed on a new narrative for trade.
    • Apart from explaining the missing value chains and integration with South and Southeast Asia, the survey should have analysed the high cost of tariffs when 38 per cent of our exports are import-dependent.

    Consider the question “In the wake of economic disruption caused by the pandemic, India needs a new narrative for trade. However, India faces the challenge of missing value chains and lack of integration with South and Southeast Asia. In light of this, suggest the policies India should adopt as new narrative for trade.“

    Conclusion

    Besides trade, FDI inflows and the accumulation of foreign exchange reserves has been remarkable this year. It is expected that India will emerge as an important link in the global value chain sector which has been visibly disrupted by the pandemic

  • Need for expansionary fiscal stance in the Budget

    The article highlights the issues with the system of Budget presentation and suggest the areas to focus on.

    Issues with expenditure and revenue estimates

    • Experience shows revenues being much less than the Budget projections: each year, this mistake is repeated and even amplified.
    • The expenditure estimates are even more disingenuous because they understate the actual expenditures that should be counted.
    • This concern has been repeatedly brought up by the Comptroller and Auditor General of India (CAG).
    • A CAG report in 2018 identified at least three methods of reducing the stated expenditure:
    • 1) Not paying for the full fertilizer subsidy.
    • 2) Not paying the central government’s dues to the Food Corporation of India (FCI) for the food subsidy, and forcing the FCI to borrow from the market.
    • 3) Using other special purpose vehicles to pay for infrastructure investment, like the Long Term Irrigation Fund.
    • In 2017-18, just those three items amounted to ₹1,29,446 crore or 1.8% of GDP.
    • These strategies are problematic because they are non-transparent and they also force other agencies (like State governments and public sector enterprises) to go in for expensive commercial borrowing.

    What CGA data reveals

    • The data from the Controller General of Accounts show that between April and November 2020, revenues of the central government predictably collapsed, by around 18%, or ₹181,372 crores, compared to the same period of the previous year.
    • But despite that, expenditures should have gone up, because the lockdown-induced collapse in an economic activity meant that public spending would be the only thing keeping the economy afloat.
    • In three rounds of stimulus packages government claimed to inject amounts of ₹1.7-lakh crore in March, ₹20-lakh crore in May, and then ₹2.65-lakh crore in November
    •  However, the public accounts show that the total spending of the central government increased by only ₹86,301 crores.
    • That was only a 4.6% increase — not even enough to keep pace with inflation.
    • In other words, the central government reduced its real spending over the period of the pandemic and economic crisis.
    • This fiscal stance obviously affects people and also adds to contractionary tendencies in the economy, and prolongs the severe demand recession.
    • Policies that destroy informal economic activities eventually come to harm the formal enterprises as well.

    Consider the question “There has been growing concerns that expenditure estimates presented in our Budget fail to represent the actual expenditure of the government. What are the reasons for that and how it could affect the reliability of government finances?”

    Conclusion

    The Budget this year needs to focus on moving to a more expansionary fiscal stance that prioritizes employment generation and public service provision.