Public spending and investment can, under normal circumstances, animate private spending and investment. If circumstances remain abnormal, it could generate inflationary pressures. Managing this would be GoI’s responsibility in the year ahead.
Nirmala Sitharaman has put her best foot forward. After a hesitant start in 2019, and an uncertain follow-up in 2020, the FM has finally earned her spurs with a clear-headed fiscal and economic strategy for reviving economic growth. GoI, for its part, has done what many have wanted it to do. It was advised to spend money, with a focus on health, welfare and infrastructure, while recouping some of it through a major programme of disinvestment and privatisation, and some through increased borrowing. It has done all this.
Whether it would revive the ‘animal spirits’ of private enterprise, big and small, remains to be seen. If increased capital expenditure by the government stimulates private investment, then the growth cycle can gradually turn upwards and the growth rate can return to the long-term average of 7.5% a year. Public spending and investment can, under normal circumstances, animate private spending and investment. If circumstances remain abnormal, it could generate inflationary pressures. Managing this would be GoI’s responsibility in the year ahead.
Chastised by widespread criticism of her inordinately long speech last February, Sitharaman not only delivered one of the shortest budget speeches in a long time, but one that kept the focus on the need of the hour — health, infrastructure, SMEs and human capital formation. As a gesture to trade policy critics who have been critical of the Narendra Modi government’s preference for protectionism over competition in pushing the ‘Make in India’ agenda, Sitharaman reversed some customs duty hikes. However, she could not resist the temptation to favour some sectors with duty hikes. Trade and exchange rate policy remain a weak spot in the government’s overall macroeconomic policymaking.
The FM’s transparent fiscal accounting, stating candidly that in 2020-21 the fiscal deficit to GDP ratio was as high as 9.5%, and budgeting for 6.8% in fiscal 2021-22, may raise some concerns. But, it will meet with the approval of economists and investors who have been urging GoI to spend its way out of slowdown and collapse.
The Economic Survey laid the ground with its chapter on sovereign rating agency bias. This is not new. In the 1990-91 balance of payments crisis too, some of us pointed at the the questionable role played by rating agencies. However, GoI must bear in mind that it is not just economic parameters, like the fiscal deficit, that rating agencies worry about. They also consider political and national security risks. By constantly drawing global attention to security risks at home and across the border, we only weaken our case for a ratings upgrade.
While GoI has bitten the fiscal deficit bullet, it remains to be seen how successful it will be in taking its disinvestment programme forward. This, and the monetisation of State assets are critical for achieving the fiscal targets set.
Interestingly, even though the defence minister has assured the country, minutes after the budget speech was read, that there has been a significant increase in the defence budget, this item was missing in Sitharaman’s speech. It is unclear why, after devoting much time to subjects that are the constitutional responsibility of state governments — like health, education, agriculture and rural development — the FM chose to not mention the one item, defence, that is entirely in the Centre’s purview.
Without doubt, 2020 was the most difficult year for India’s economic policy managers. Given the challenge, Sitharaman has managed to recover some of the Modi government’s lost reputation for economic management. To recover lost ground fully and gain recognition for restoring momentum to a faltering economy, GoI’s economics and politics have to be in step and it must walk its talk.
Sitharaman began her speech listing many anniversaries that the nation would commemorate in 2021. It was churlish of her not to mention the fact that 2021 also marks the 30th anniversary of the first major round of fiscal, industrial and trade reforms and disinvestment, under the leadership of a prime minister whose centenary is being celebrated this year. Her party may not have liked her paying that tribute to PV Narasimha Rao. But she is, after all, a daughter-in-law of Hyderabad.
(The author is the former Secretary General of FICCI)