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The general Budget in India is a difficult exercise and this year’s budget in February is no different. With the objective of minimising the impact of the unprecedented Covid-19 pandemic on the economy, the Finance Minister will have to do a tight rope walk to fulfill conflicting demands while keeping the balance between growth and strong macro-economic fundamentals. Nevertheless, with many rating agencies forecasting a double-digit growth in 2021-22, on a low base this financial year, Sitharaman is bound to give further boost to Prime Minister Narendra Modi’s Aatma Nirbhar Bharat agenda as it is the only way forward to kick-start the economy to get back to high growth path.
The rating agencies have also indicated that in subsequent years the ‘business-as-usual’ approach will make India settle down to 6-6.5 per cent growth path if structural reforms are not pursued vigorously. If India were to realise Modi’s effort to achieve $5 trillion economy rapidly, India needs to get back to its 8-9 per cent growth path on a sustained basis. This is possible only if Sitharaman announces more fiscal incentives under Aatma Nirbhar Bharat to encourage more foreign companies to set up shop in India, and to make India a global manufacturing hub.
The seeds have been sown for this purpose with Government announcing the three Aatma Nirbhar fiscal packages amounting to about 15 percent of GDP. Make in India and Aatma Nirbhar Bharat are two sides of the same coin and this has been Modi’s philosophy right from when he assumed office in 2014. Modi 1.0 laid the foundation for it by creating the necessary platform in the economy. The pandemic and the geo-political situation has set the stage for a big push for ‘Aatma Nirbharta’ as growth can come only from pressing on the peddle in manufacturing and agriculture. Services, which already accounted for over 50 per cent of GDP, has reached a growth plateau after dominating for nearly three decades. Manufacturing of IT hardware provides a major opportunity and the government has rightly taken major initiatives as part of the Aatma Nirbhar fiscal package - more is expected in the upcoming budget to this job-generating hi-tech sector.
Infrastructure development holds the key to step up public expenditure, necessary to reverse the sagging economy after the pandemic enforced lockdown. As part of the Aatma Nirbhar package, the budget is expected to encourage further Make in India defence production, announce more dedicated freight corridors and bullet train projects apart from more metro rails to push growth and jobs in the country. This will also revive sagging labour-intensive construction industry, which will get a fillip due to this public expenditure coupled with greater investments on highways, expressways, airport and port developments.
After the lockdown and general slowing of the economy in the last few years, the need of the hour is to push demand by putting more money in the hands of people, as also advocated by a school of economists. But this must be done in a calibrated manner, as rightly done by the government through the MGNREGA programme and fiscal incentives given for kickstarting MSME sector. The MSME sector is a major job creator in the economy accounting for over 40 per cent of exports and 45 per cent of manufacturing. At this juncture putting just more money in the hands of the people might not fully work as the poor has spent most of their savings during the lockdown. More money put directly into their hands might go into replenishing their depleted savings rather than more spending to revive demand. In such a scenario, a better way would be, as adopted by Modi government, is to provide in kind support by way of free ration food grains, cooking gas, besides more rural works through MGNREGA. This was aimed directly to revive rural demand. A further push to agriculture reforms will also help revive rural economy.
There is already increased spending by 13 per cent this year as part of the counter cyclical policy. But this will push India’s fiscal deficit to 7.2 per cent of GDP in 2020-21. States too will report fiscal deficit in excess of 4 per cent of GDP, upping gross borrowing to 11 per cent of GDP. However, the Finance Minister need not worry as the biggest advantage the government has, at the moment, is low or positive current account deficit and high foreign exchange reserves. This provides much headroom to offset the high fiscal deficit.
The green shoots seen in the last few months will help the economy to rebound in 2021-22 with double digit growth rate and strong tax revenue growth. Even non-tax revenue from disinvestment, government’s privatisation programme and 5 G auctions is bound to be buoyant in the coming year which will give enough space for Sitharaman to step up public expenditure while ensuring fiscal consolidation. She may increase spending by at least 10 per cent as she contains the fiscal deficit to 5 - 5.5 per cent in the next fiscal, with tax revenue buoyant at over 18 per cent next year. A lot of work has already been done such as reducing corporate tax rate, production linked incentives to 13 sectors and improving Ease of Doing business to attract investment.
Even the International Monetary Fund (IMF) dubbed Modi’s Aatma Nirbhar Bharat as an important initiative. The Indian government through many fiscal relief packages and reform measures have created avenues and opened opportunities for primary and secondary sectors. IMF said that the dismantling of mandis in agriculture and the labour law simplification for manufacturing will improve incomes of the people. Production linked incentives to sunrise sectors, including auto and tech, is also as much about self-reliance as it is about offering cash incentives to boost domestic production thereby expected to create employment.
Further, the Ease of Doing Business will build a sustainable eco-system for the MSME sector in India besides fostering innovation, enhance skill development and encourage employment.
As it is often said every crisis brings with itself an opportunity. Likewise, the Covid-19 pandemic brought with itself an opportunity for India and Modi has rightly identified it as Aatma Nirbhar Bharat - making India self-reliant. When the concept of ‘Make in India’ was announced in 2014, it was successful in igniting the idea and now is an opportune time to fully execute that idea. Sitharaman is widely expected to provide the much needed thrust in the upcoming Budget to rekindle the animal spirit among investors.
K R Sudhaman
• K R Sudhaman is a Delhi-based independent journalist