The article deals with the marked departures in this year’s Budget and the challenges in realising the changes.
Three paradigm shifts from past in this the Budget
1)Increased infrastructure spending
- The main theme of the budget is a big thrust on infrastructure spending and public investment.
- If the budgeted numbers are realised, capex would have grown from 1.6 per cent of GDP pre-COVID to 2.5 per cent in two years.
- With India’s investment/GDP ratio falling by 5 percentage points over the last decade, a sustained public investment push — with its large multiplicative effects — is a much-needed impetus to reinvigorate growth and create jobs.
Implications of increased spending
- The certainty sustained public investment is likely to crowdin private investment.
- The certainty of investment-led employment that is likely to reduce household precautionary savings.
- However, higher capex spend is being paid for by disinvestment and privatisation.
- Effectively, non-core public-sector assets that don’t generate positive externalities — and, in fact, potentially distort the sectors they compete in — are expected to be replaced with much-needed physical and social infrastructure.
- This newly created physical and social infrastructure emanate positive externalities and necessarily suffer from under-provisioning by the private sector.
- If successfully executed — this will not be a case of selling the family silver to pay a credit card bill.
- Instead, it will be akin to a productivity-enhancing asset swap on the public sector’s balance sheet.
2) Shift in the way for financing infrastructure
- In stark contrast to the PPP model, infrastructure will now be financed off public sector balance sheets and, once operational and viable, will be monetised so as to recycle proceeds into the next project.
- In theory, this is the appropriate division of public-private risk sharing.
- It combines the public sector’s ability to better mitigate upstream risk while taking advantage of the glut of global liquidity potentially attracted to downstream projects.
3) Shift is towards more conservative and transparent fiscal accounting
- There has been much focus on bringing the Food Corporation of India (FCI) liabilities back on the budget.
- Less appreciated is the conservatism with which tax revenues have been budgeted for.
- Revised estimates peg this year’s gross taxes at 9.9 per cent of GDP.
- But for that to happen, taxes, net of excise, will need to contract by 20 per cent in the last quarter.
- So it’s very likely gross taxes will end up 0.5 per cent of GDP higher this year.
- Not only is this a welcome departure from the past when revenues were consistently over-budgeted, but it sets the base for next year.
- With nominal GDP expected to grow in double digits, it’s likely taxes, net of excise, will experience a higher-than-unitary-elasticity to growth, especially given the increased formalisation that COVID has spawned.
- Tax collections are, therefore, likely to exceed budgeted levels in 2021-22.
- It behooves a very uncertain macroeconomic environment and creates some buffer if crude prices keep rising or other revenues don’t materialise.
- Credible accounting over time will bring down risk premia in bond yields, and paradoxically generate a stimulative impulse.
Three challenges in realising these changes
1) Execution challenge
- The budget’s impact on shaping the macroeconomic narrative will depend on the speed and efficacy of simultaneously building and selling public assets.
- It will be important, for instance, to front-load disinvestment and strategic sales to take advantage of buoyant equity markets before global central banks become more cautious.
- With debt likely to rise to almost 90 per cent of GDP this year, it’s now incumbent on all stakeholders to consistently deliver the 10 per cent nominal GDP growth that’s needed to first stabilise debt at these levels and then bring it down.
- Viewed from this lens, it is a budget where execution is vital.
2) Withdrawal of the policy support at appropriate time
- While fiscal policy is being appropriately counter-cyclical at the moment, it must be equally nimble in the other direction.
- When the recovery gets more entrenched, policy support should be withdrawn with equal speed and alacrity.
3) Role of monetary policy
- With fiscal policy playing a primary role, monetary policy must slowly take a back seat.
- The combination of a more relaxed fiscal path and domestic private sector savings normalising after the COVID surge could result in equilibrium bond market yields rising [fall in the price of bond] — but that is a cost worth incurring for a meaningful public investment push.
- In the near term, the RBI may focus on ensuring this new equilibrium is reached in a non-disruptive manner.
- Given the current slack in the economy, it’s understandable if fiscal and monetary are temporarily complementary.
- But as confidence in the recovery grows, fiscal and monetary must quickly become substitutes — with the RBI progressively normalising liquidity to wardoff financial stability and fiscal dominance concerns — so as to safeguard macroeconomic stability.
Consider the question “This year’s Budget marked many departures from the past Budgets. However, there are several challenges in realising these departures. What are such departures and identify the challenges in realising them?”
Conclusion
The budget must be commended for embarking on important paradigm shifts. But its success, and in turn the sustainability of India’s recovery, will now come down squarely to policy execution and coordination.
