To jumpstart the country’s post-pandemic economic revival, this budget was required to be precise and have immediate actionable measures to promote growth in a fair, equitable, and timely manner. It also required a spearhead and follow-through on the three essential themes highlighted in the previous year’s budget: Aspirational India, which promises a better standard of living for all sections of society; Economic Development for all; and finally, a Caring Society, with a focus on humane and compassionate social reforms.
Nirmala Sitharaman had the unprecedented difficult task of preparing a budget in a pandemic.
Prof Atul Sarma, Visiting Professor, Institute for Studies in Industrial Development, New Delhi shared that this budget is being presented in a very difficult situation with a unique burden of expectation to put India back on the recovery path, following a deep recession induced by the COVID-19 pandemic, while managing an unenviable fiscal deficit.
Budget 2021 & Economic Reforms 2.0 towards New India was highlighted by Dr. Dhiraj Nayyar, Director, Economics & Policy, Vedanta, OSD & Head, Economics, Finance and Trade with NITI Aayog in a talk organized by IMPRI Impact And Policy Research Institute, New Delhi.
In one context, Dr. Dhiraj Nayyar said the budget was presented in a unique backdrop of a sharper slowdown, resulting in 7-8 percent of contraction for the year resulting in a significant loss. He shared it is important to realize that it will take some time to regain a normal state. Focussing on the brighter side, he says that challenging situation has given us a canvass of opportunities.
India’s Economic Deceleration Before The COVID-19 Outbreak
Talking about the economic slowdown before the COVID outbreak, he says that India’s GDP growth fell continuously for eight quarters from 8.2 percent in March 2018 to 3.1 percent in March 2020 due to stagnation in private investments. The private investments as a part of GDP are budging at 28-29 percent since the year 2011 compared to 36 percent in 2003-2008. China and East Asian countries, which have grown economically, had private investments as 40 percent of GDP. “Fundamentally, 29 percent of the GDP ratio in private investments is not enough to sustain 8-10% GDP growth,” says Dr. Dhiraj Nayyar.
The second major engine of growth, i.e., exports, which have not been promising even before the COVID-19 outbreak, was at stagnant levels for the past four to five years without any significant economic growth due to the disruptions experienced by Global Trade Policy caused by unilateral and arbitrary actions. However, India’s global trade share is pretty low, being 1.75 percent, but it can be uplifted through exports if India is competitive enough. Failure in raising exports is due to some fundamental weakness in the economy predictor.
Economic Reforms: Budget 2021
Setting twin contexts of COVID-19 impact and economic slowdown, he says that the Budget 2021 had to address both the challenges of shock posed by COVID, which was unprecedented, and the other challenge of bringing India back to a higher and sustainable growth trajectory. “For India to become a higher middle-income growth country, we need to grow at 8-10% in terms of GDP for 20 years at least,” says Dr. Dhiraj Nayyar.
Talking about the GDP share in GDP, he mentioned that government funding is one of the smallest components capturing only 14-15 percent of GDP. Thus government size will always be limited, and one must be realistic about how much government can do to lift the entire economy.
“The government role is more in enabling in framework both microeconomic and structural and less in terms of actually raising GDP,” says Dr. Dhiraj Nayyar.
Macro-Economic Fiscal Policies
It was one of the important aspects given the COVID backdrop and the sharp fall of growth, government seemed to have finally abandoned its fiscal conservatives, and observation during the peak period of COVID was that the government relied mostly on liquidity and monetary measures to support the economy and vulnerable sections.
The Government was more limited on fiscal stimulus in terms of fiscal outgrowth. However, a certain amount of cash transfers to the poor section, but by-and-large India’s fiscal stimulus was relatively small in terms of outgo compared to other countries.“Government is finally in favor of stimulus, and this budget has come out where it can be fiscally liberal, but still needs considerable financial support to get economy back at track,” says Dr. Dhiraj Nayyar.
There has been an increase in capital expenditure from 1.6 percent of GDP in FY20 to 2.3 percent of GDP in FY21 Revised Estimates (RE) and further to 2.5 percent of GDP in FY22 Budget Estimates (BE). However, its context is very important because if we look at capital expenditure, the amount committed is about 5 lakh crore, whereas total government spending is 35 lakh crore. Therefore this stimulus remains a small amount of total government funding. “Any increase in capital spending is welcomed because it gives capital returns, and one can afford fiscal deficit if we spend on capital expenditure,” says Dr. Dhiraj Nayyar.
With a fiscal deficit of 9.5 percent of GDP, there was limited scope for any significant tax concessions in Budget 2021. Talking about a positive aspect of the budget, he says that taxing at this stage would have been counterproductive to the idea of the stimulus, and the government has suggested that there would be a stable tax framework.
The FRBM Act mandates a fiscal deficit of three percent of GDP to be achieved by 31st March 2020-2021. The effect of this year’s unforeseen and unprecedented circumstances has necessitated the need for amendment in it, by the views of the 15th Finance Commission, the government is now allowing a normal ceiling of net borrowing for the states at 4% of GSDP for the year 2021-2022. Dr. Dhiraj Nayyar applauds the government’s decision to abandon a fiscal deficit of 3 percent of GDP.
It was not an appropriate framework for India, significantly when private investments are slowing down. For the foreseeable future, the government must spend on investments to the crowd in the private sector. However, it would be hard to meet the government target of 6.8 percent which would depend heavily on disinvestment.
“One side FRBM fiscal conservatism and the other side monetary policy framework which demands inflation targeting has not done a great job for growth in India, as we can see when demand is completely depressed, inflation in India is measured by consumer price index running at 5-6 percent,” says Dr. Dhiraj Nayyar.
Interest rates in India are generally too high for the kind of growth required, partly because of the inflation-targeting framework, which does not work well. As it is a demand management framework irrespective of India, where supply factors cause inflation issue. Fiscal conservatism and monetary policy framework have not given India the kind of micro-framework needed for rapid growth.
Thus it is a welcome step of correcting the FRBM part, but the monetary policy framework also needs to be relooked. The COVID-19 situation has exposed that inflation can be high in India even when demand is depressed. “Interest rates are not a good instrument to control food and fuel inflation; there is a need to correct the overall macro framework for ensuring growth,” says Dr. Dhiraj Nayyar.
PSU’s dominate strategic sectors like defense but 90% of defense sectors prerequisite requirements are imported due to lack of quality.
Concrete Thinking In Financial Sector
The banking system is in a mess for several years, and the government’s efforts to recapitalize public sector banks were not solving credit flow and Non-performing Assets (NPA) in the banking sector. The banking being the heart of the economy, it’s necessary to uplift the financial sector. The government has also proposed a wrong bank-like structure to manage non-performing loans better.
An asset reconstruction company and asset management company structure will be set up to take over the bad loans on public sector bank balance sheets and manage recoveries. It also proposed to privatize two public sector lenders and one general insurer, which is a big step that would improve governance and lending methods.
India will set up a new development finance institution to raise funds for infrastructure. It will be set up with a capital base of Rs 20,000 crore. It will have a lending target of Rs 5 lakh crore to relieve the banking system of unnecessary stress of infrastructure financing, which is highly long-term with the banking system inadequate to deal with it. “In Budget, there is a more determined effort of coming up with solutions, which will free banking from protracted massive spending to enable growth in all sectors of the economy,” says Dr.Dhiraj Nayyar.
The Mega Push Towards Privatization
Dr. Dhiraj Nayyar appreciates the government’s intention to privatize. As part of its economic package to combat the pandemic, the government had announced its intent to exit non-strategic sectors as well as reduce its presence in strategic sectors to a maximum of four firms. But he doubts that there might be no strategic sector.
The defense is the most strategic sector in India, it imports 90 percent of its prerequisite requirements. The Public Sector Undertakings dominate the strategic sector, yet they don’t produce quality goods. “What is the use of strategic PSU if it can’t meet your defense and oil needs,” says Dr. Dhiraj Nayyar.
He further comments that the government makes mistakes of viewing disinvestments and privatization in revenue terms ignoring the major factor of efficiency, hence until the narrative of seeking revenues is changed, the execution of it might be difficult as everyone will focus on how much a company or a particular land asset is sold for. “There is a need for changing the narrative from revenue to efficiency and privatizing lower hanging PSUs first,” says Dr. Dhiraj Nayyar.
There is also a need to change people’s narrative as many view organizations’ sale to promoter-owned organizations. However, there is an alternate way of selling by diluting the government shares to below 50 percent, as the moment when it comes below 50%, it will cease of being a PSU. “Through disinvestment framework, we could set up firms which are widely held by the Public and are professionally managed to unlock a lot of efficiencies,” says Dr. Dhiraj Nayyar.
Driving Growth In Manufacturing
Talking about tariff and trade liberalization Dr. Dhiraj Nayyar comments that they don’t create competitive manufacturing, and require many other reforms. The production-linked incentives (PLI) schemes will also enable manufacturing companies to become an integral part of the global supply chains in core competency and cutting-edge technology.
To provide relief to MSMEs, which have been hit hard by the high cost of raw materials, import duties on several steel items have been slashed. Simultaneously, on certain steel products, the anti-dumping duty (ADD) and countervailing duty (CVD) have also been revoked. “If you have to talk about generating jobs post-COVID, among 40 percent of the workforce which comes from agriculture sector producing 13 percent of GDP, some of it needs to go to the manufacturing sector for employment opportunities,” says Dr. Dhiraj Nayyar.
It is an excellent time to focus on manufacturing as the world is looking to diversify away from China and looking for alternative supply chains. India as a large economy is undoubtedly one potential place for investors. “It is a strategic thrust towards manufacturing and should be given a chance. It should not be viewed negatively,” says Dr. Dhiraj Nayyar.
Emphasis On Welfare Activities
The budget accorded special attention to the healthcare sector, increasing the overall outlay to health and wellbeing to nearly 2.25 trillion rupees, rising more than 135 percent over last year. The enhanced allocation and the plan to look at healthcare holistically – including nutrition, sanitation, clean drinking water, and pollution control, certainly augur well for the country. The kind of allocation rise to Jal Jeevan Mission indicates the real push towards providing safe and adequate tap drinking water to every household.
India’s focus on manufacturing can lead to more investment and growth as a manufacturing alternative to China.
Need For A Cash Transfer Program For Poor
Dr. Nayyar emphasizes the need for a cash transfer program for the poor, as the kind of direct income support would have helped the poor in these difficult times and would have boosted consumption. With the availability mechanisms of direct cash transfer and efficient infrastructure to enable cash transfer, cash transfer could have been a welcome step both as welfare and growth-enhancing measures.
“The Government is betting on growth rather than redistribution which is a welcome change,” says Dr. Dhiraj Nayyar.
Dr. Sarma mentions the need for direct cash transfer. Cash transfer would have helped meet existing demand efficiency and the recovery needed given 38 million jobless people.
Concluding Remarks
In the concluding remark, Dr. Dhiraj Nayyar says the Indian middle class should be much more invested in medium-term growth, creating opportunities and leading to more income than a 5 percent or 2 percent tax break. It was a unique opportunity politically and economically because of the budget crisis.
It is an overall reasonable budget that will hopefully bring back the economy to pre COVID situation and further enhance it four-five years down the line if various budget aspirations are done efficiently and effectively. “We are a slice of cake type political economy, not the size of the cake, where everyone is interested in taking their shares, and no one is bothered in increasing that size, so let that size grow first,” says Dr. Dhiraj Nayyar.
Dr. Nayyar says correctly that implementation is a key and some time back we never thought a platform like Aadhar can be created, and this could become the backbone of many reforms and scheme’s implementation. The government is employing many more technologies across the board for monitoring and governance, so there are ways where the proposed initiatives can be implanted.
There exist values in decentralizations in decision making and implementation. So this flexibility will allow more innovation and leveraging the private sector capacity in implementation, especially at the state level for efficiency and productivity improvement. This government has done good work in monitoring and ensuring the projects to be implemented.
Dr. Nayyar says that disinvestment is the strategy that makes the maximum impact and existing bureaucracy lacks direct hands-on experience in the disinvestment process. Further, ensuring transparency would help the process. However, the listed, profitable and well-functioning firms should do disinvestment first before going for companies like Air India who have their own legacy and challenges along with them. Having little success on this front at the beginning of the process would help the government give pace to this process.
Aadhaar and other forms of monitoring and governance could play a crucial role in implementation.
He opinionated that he is not a great fan of protectionism or raising the tariff for any length of time and they may not solve the more significant issues. As we are a fairly low-cost economy, we need to address some of the basic problems to enhance the competitiveness of the Indian companies. In India, MSME, 90 percent of the companies are of micro nature. To compete, there is a need to have a certain scale to encourage firms to become bigger and use the benefit of scale, which will add to competitiveness. Therefore tariff should be a short-term measure to strengthen the Indian companies first to improve the supply chain and basic infrastructure.
While talking about demand maximization, Dr. Nayyar says that considering COVID being on its last leg and India being fortunate not to have issues of COVID like the US or Europe might do well with more vaccination recovering from uncertainty in few months. He suggests cash transfer to the poor for the period to enable the continuation of demand can. However, the companies may continue to be cautious even in the medium-term before going back to the pre-covid spending. However, it would be interesting to see how the reform such as the farm bill goes as they may impact other planned reforms, especially the privatization and disinvestment.
Dr. Arjun shared that some experts are sharing that PM Kishan Nidhi is spending almost 2000 per quarter for 10 crores beneficiaries. Some inputs should be expended to other 5-course families to include the other non-form low-income families. We are also looking at the dynamic budget as the Finance Minister is open to more of such initiates.
Dr. Nayyar responded that this is an unprecedented time and that is why such initiatives are needed and the government has the option to monetize the system going even further and by putting in more money. However, this government is taking a cautious approach, and the current government is banking on private consumption and private investment and is hoping there is no need for heavy lifting.
The government has extended the further spending to other initiatives, including adding more budget to MGNREGA and other programs. Therefore all the options are open but the government is adopting a conservative approach to monetizing.
Dr. Arjun pointed out the need to have clean data and ensure transparency for the rating agency to have more faith in the government system. Dr. Nayyar responded that we should focus more on growth, as investors will give more preference to growth than otherwise, and being physically deficient can be more impactful once we are having good growth in the economy.
On the questions of having a new company proposed in the budget for managing the NPA of the bank by Dr. Arjun, Dr.Dhiraj Nayyar responded there is a need for the government to make a call between the options of either getting some value of loss-making companies or allow them to be in government control and letting die down even further.
Therefore the government may choose to get less valuation while still focussing on ensuring the efficiency for that asset class. This will finally enable the market to determine the price for PSU or any other assets, thereby restricting bureaucrats or government to control it.
Ms. Pankhuri Dutt, Public Policy Consultant, NITI Aayog, said that Capital Expenditure came at the cost of the revenue expenditure; thus there was a need to increase the total spending. Revenue expenditures would have to lead to more job creations than capital spending. There exist a dichotomy in the budget as well, especially in the health sector.
While talking about health sector schemes, Dr. Nayyar agrees that there was no need of bringing up a new scheme in the health sector because sectors like health cannot be centrally driven due to variations in requirements in the health sector for different states. Some of the schemes of social sectors like health and education should be left for the states to decide rather than driven as centrally sponsored.
While responding for targeting income taxpayers through direct benefit transfers and giving employment benefit incentives to small firms, Dr. Nayyar said it’s challenging to achieve the disinvestment target unless the government sells three blue-chip PUSs which is a difficult task to be implemented in one year, however, he refrains himself from the idea of raising taxes, and says that any incentive for imparting growth are worth. Thus he emphasized growth-minded rather than being revenue-minded.
Dwelling upon the reason for not getting the dividend of the kind from the GST was because it was based more on political knowledge than economic logic. As we go forward with the GST council, they should not focus on rates to meet a particular target, rather there is a need to have a stable GST environment to ensure growth. Ideally, we should have only two revenue-neutral rates of either 0 percent or 12 percent because five tax structures lead to rent-seeking and inefficiency. Less discretion and lower rates lead to growth thereby providing enough revenues.
“For growth and revenue dividend we need to take a slightly longer view, there is a need to focus on rates to get efficiency which will, in turn, lead to achieving targets,” says Dhiraj Nayyar.
Dr. Kumar talks about the National Infrastructure pipeline and many industrial corridors that have been proposed along with the smart cities mission and in terms of doing ease of doing business there is a need of stilling confidence and competitiveness in the market.
While talking about good governance and the hindrances faced by private investments, Dr. Nayyar comments that corruption is a human condition that is prevailing in every sector of society at different income levels. However, to minimize corruption, we should use as maximum technology and little discretion as possible. There should be the right incentives and the right systems in place. There is a need to recognize the importance of pace in, transparency, and self-certification to attract investors and private investments. We need to stick to present corporate taxes for 10-15 years to impart confidence in investors.
“The idea of embedded clearances should be pushed to attract private investors,” says Dhiraj Nayyar.
While talking on prospects in technology emphasizes the importance of data, Dr. Nayyar says there is a need for a skilled workforce to adapt. Also, a bigger economy can only provide social security, in conditions of major job losses which need to be aimed at. Further, he comments that any big change comes up with resistance, and managing it is important.
Prof Atul Sarma pointed out that the budget had a fiscal consolidation approach. He also emphasized the importance of research and development in the manufacturing sector. He further questioned, was it not necessary in manufacturing to attempt to go for judicial reforms, or are there any judicious ways to attract a high-cost economy?
Dr. Dhiraj Nayyar responds that judicial reforms are an important part to impart confidence, but these reforms lack pace in getting a resolution. He says Research and Development is something that central government needs to take up rather than state governments, there is much more required focus in research which is merely fulfilled by the budget allocated to it. Department of Science And Technology should be given much more importance because that is the future.
Certain sectors in the service economy such as aviation have done well, while others have suffered.
Prof Atul Sarma mentions that for a demographic dividend, we need to invest in social sectors and the allocation to the education sector which has gone down in the budget, which is a matter of great concern. Human Development is essential because without it we will not be able to attain demographic dividend.
Adding to it, Dr. Nayyar comments that the entire education system needs a relook in terms of the actual outcomes with regards to learning and employability. Hypocrisy in the education system for not allowing for-profits should attract clever entrepreneurs who can develop business models at scale to provide quality education.
Talking about the service economy Dr. Dhiraj Nayyar comments IT, telecom, and aviation have done fairly well. Still, other sectors like tourism, health, education, and banking need a boost up. These sectors can give up foreign exchange, GDP growth, and job. The sectors of health and education can also be seen as growth sectors rather than being just judged as social sectors.
On the issue of the FDA with China, he responded that it might not be beneficial, but if we decided to join or otherwise, we should use it to make us structurally competitive. However, he pointed that FDA will not help us to transform ourselves as improving the competitiveness. Dr. Dhiraj Nayyar also pointed out that India has huge potential to improve, do better, and help other countries. He shared that many countries like China, Korea, and Taiwan have increased their per capita income and India has to do a lot.
He shared that we should focus on speed, scale, and growth while expanding the base of the Indian economy and lastly he shared that it’s not the government who should lead the economic growth but the role of new-age entrepreneurs in India. Regarding Atma Nirbhar Bharat, he shared that it should focus on self-improvement and making our self-making ourselves more competitive economy
In the end, Prof Atul Sharma and Dr. Arjun Kumar thanked the speaker for his enriching and balanced view while being optimistic about the economic growth and the country.
Dr. Soumyadip Chattopadhyay, Dr. Arjun Kumar, Ritika Gupta, Anshula Mehta, Nishi Verma Impact and Policy Research Institute (IMPRI)