In June 1991, the Indian economy was teetering on the brink of a precipice. Albeit reluctantly, the P.V. Narasimha Rao government responded by freeing up the economy and opening it up to the world.
As finance minister Nirmala Sitharaman presents her first full year budget, the second Narendra Modi government has one and only comfort to hold on to: the macro-economic situation is nowhere as precarious as it was in 1991. But that’s not saying very much.
The advance estimates of national income released on February 6 showed that, barring a miracle in the final quarter of the current fiscal, the economy is likely to clock the lowest growth in 11 years. Other economic indicators – index of industrial production (IIP), trade, index of core industries – also painted a somewhat dreary picture. It is being said that the month on month figures show that the economy has bottomed out, but that has been said often in the past two years.
And how does this government appear to be responding? Turning the clock back on many reforms initiated since 1991. The Insolvency and Bankruptcy Code, the implementation of the goods and services tax (GST), the opening up of the coal sector and the constant invocations on ease of doing business can no longer divert attention from the knee-jerk price controls, raising of tariff walls and protectionism and suspicion of profits (two examples being the extension of the National Anti Profiteering Authority and attacking Amazon on predatory pricing). These are the things the economy certainly does not need at this point of time.
So what does it need?
What both the national accounts and IIP figures show is that two employment-intensive sectors – manufacturing and construction – are in deep crisis. Construction has the highest employment elasticity of around 1 and manufacturing 0.33. Growth in gross value added (GVA) in construction is likely to be subdued – from 8.7 per cent in 2018-19 to 3.2 per cent in 2019-20. Similarly, GVA growth in manufacturing is set to slump from 6.9 per cent in 2018-19 to 2 per cent in 2019-20. The IIP data underscored this. Clearly, these two need to be focus areas. But how can the budget help perk them up?
There are actually two parts to the budget. There’s the budget as a dry accounting statement – how the government plans to raise revenue and where it plans to spend it. And there is the budget speech, which sends out powerful signals about the directions a government intends to take in managing the economy.
It’s hard to see how the budget by itself can boost the economy in a major way. Sure, government spending on infrastructure will help. It will create demand for specific industries and provide jobs that will spur private consumption. The recently unveiled Rs 102 lakh crore National Infrastructure Pipeline is expected to do just that. But where is the money to come from?
As long as the economy is in slowdown mode, tax revenues are not going to increase soon. The September cut in the corporate tax rate, though a necessary move, will mean less coming in from that route. There will be pressure on the government to do something similar on the personal income tax front, if only to put more money in people’s hands. Even if it doesn’t succumb to that pressure, that is not going to bring in a huge amount. The central government’s hands are completely tied on the indirect tax front, thanks to GST on which it cannot take any unilateral action.
So then it will have to look at non tax revenues and capital receipts, which is not as easy as taxing companies or individuals. It can try and push strategic sales of public sector undertakings (though revenue generation is not a good reason for doing this). But the big ticket targets did not get much traction this fiscal. What if the story is repeated the coming year as well? Asset sales – land, buildings and the like of PSUs – is one way of getting money but going by media reports, that source is being milked in the current fiscal itself. That will not leave very much for 2020-21.
Auction of 5G spectrum are expected but with the telecom sector in deep crisis, there is a question mark on how much can be raised through this route. And how much can the government lean on PSUs and agencies like the Reserve Bank of India to transfer more as dividends?
That leaves only the budget speech.
In her speech, Sitharaman should certainly refrain from creating more disquiet in the business community as well as consumers. She should most definitely allay some of the fears that ill-advised statements by her colleague Piyush Goyal have raised. Any announcements should stress the fact that ‘profits’ is not a dirty word for this government, that businesses will not be viewed with suspicion, that big-versus-small and foreign-versus-Indian bogeys will be cast aside.
Nor should she raise hopes about areas in which the central government has little leeway. Specifically, the two favourite asks of most commentators – reforms in land and labour markets as well as agricultural marketing. These are subjects where the states have a greater say.
Most importantly, the speech should give clear indications that policy and bureaucracy related issues hassling labour-intensive sectors within manufacturing will be addressed. Some of these are simple things like tax refunds. This does not require any legislation that is politically sensitive and can be stalled in parliament. It just requires firmness of the political executive to ensure that its policies are implemented on the ground.
This may not bring immediate gains. But the government must eschew hasty actions whose impact will likely fade away. It must use this crisis to put in place policy as well as actions that place the economy on a firmer foundation. Flourishes can wait till then.
(The writer is a senior journalist and author. She tweets at @soorpanakha)
The views expressed above are the author’s own. They do not necessarily reflect the views of DH.