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Budget 2021: An economic Covid vaccine for India

New Delhi - India’s finance minister Nirmala Sitharaman presents a growth budget amid a pandemic that buoys the stock market.

The cardinal rule in public policy is that you never over-promise. This year’s budget presented by India’s Finance Minister (FM) Nirmala Sitharaman is probably the first time that public policy has been both over-promised and over-delivered.

And the smell test of its success was the instant response of the stock markets. To begin with the sentiment was rather jittery, especially given the buzz of a Covid-19 cess on income tax; this then gave way to cautious optimism after the FM commenced speaking; and, finally exuberance after Sitharaman concluded — net-net, the BSE Sensex rose five per cent to close at 48,600.51 points.

The reason the markets and most analysts are buoyed is that they see this budget akin to the ‘New Deal’ launched by President Franklin D Roosevelt in the aftermath of the ‘Great Depression’ of 1929. If then it was a “new deal” for the “forgotten man,” in this instance it is a new deal for a new-India. Wherein the mantra is one where economic power will be democratised (and not concentrated in the hands of a few), an economy leaning on the side of market forces and one governed by rules and not a discretion-based regime.

Transparency

In this the budget was the first lesson in transparency. Exactly why the stock markets did not go into a tizzy, when the FM went on to admit to a record slippage in the fiscal deficit (gross borrowings of the government) in 2020-21 and that it would be borrowing a staggering Rs12 trillion (t) next fiscal year. The honesty was well received because the markets have in the past been taken for a ride by her predecessors who ensured fiscal rectitude on paper by cooking their books. She was upfront about the fiscal largesse and also committed to a glide path that will pare it down. As they say honesty is the best policy.

They are also giving Sitharaman a pass because of the spending priorities as well as the FM’s demonstrated ability to reduce leakages in social welfare spending (the shift to direct benefit transfer saved the exchequer Rs 1.7t cumulatively at the end of March last year).

Unlike earlier, the priority from now on is to step up spending under capital heads to create economic assets which will be a force multiplier for the economy. Borrowing is just a means to achieve an end. Where earlier there was an obsession with the level of the borrowings, now the priority is to ensure quality spending — enforcing a fundamental mindset reset.

And in a Covid-19-ravaged economy, spending is the best means to revive growth. Exactly the prescription shared in the Economic Survey 2020-21 — the annual economic report card released last Friday. It viewed fiscal policy as the “economic bridge” to guarantee the medium and long-term health of the Indian economy. Accordingly, it exhorted the FM to be “guided by considerations of growth and development rather than be restrained by biased and subjective sovereign credit ratings.”

And she did not disappoint.

Minimum government

Another stand-out feature is the radical reset of the role of the state: from being a creator to a facilitator. Beginning with the Second Five-year Plan, the government envisaged the public sector as the “commanding heights” of the economy.

On Monday, the FM formally declared that the role of the public sector was being reimagined. She made clear that going forward the public sector presence would be restricted to strategic sectors.

“(The priority is) minimising the presence of Central Government Public Sector Enterprises (CPSEs), including financial institutions, and creating new investment space for private sector,” she said, before bluntly adding, “CPSEs will be privatised, otherwise shall be closed”.

And since this policy is attached as an annexure to the FM’s budget speech, eventually when Parliament passes the budget this fundamental policy shift will be written in stone.

A bad bank

The FM also chose to bite the bullet on the idea of floating an entity which will take over the bad debts of public sector banks.

The stock of bad debt is poised to grow in the aftermath of the economic destruction caused by the pandemic, especially in the contact economy made up of civil aviation and hospitality. Recently the Reserve Bank of India (RBI), the country’s central bank, had warned that this would surge to 13.5 per cent of total advances — just under double of what prevailed a year ago.

What the bad bank will do is clean up the books of public sector banks. Consequently, it will lower the cost of lending for banks as they will no longer have to incur costs providing for the bad debts. Without the debt overhang, banks will also have run out of excuses to not lend to commercial enterprises. If, indeed, the banks do follow through it will kickstart the investment cycle — in the doldrums since the global crisis of 2008.

No wonder, the Nifty Bank Index surged by 8.26 per cent to 33,089.05 points.

Future proof

The FM has also drawn up a clear plan to secure the government’s vision of a ‘New India’.

Central to this is the formal acknowledgement that India’s health infrastructure is well past the sell-by date; something that the Covid-19 pandemic had exposed. “Taking a holistic approach to Health, we focus on strengthening three areas: preventive, curative, and well-being,” Sitharaman said.

Besides developing capacities in primary, secondary, and tertiary care health systems — funded by a new programme with a budget of Rs 641.8 billion (b) to be spent over six years — the strategy commits to providing drinking water universally, a holistic plan to rewire urban India under an Urban Swachh Bharat Mission 2.0 with a total financial allocation of Rs1.41t to be spent over the next five years.

Including the cost of funding the covid-19 vaccine programme with an initial budget of Rs350b, the total outlay under ‘health and wellbeing’ has been bumped up to a staggering Rs2.23t, as compared to Rs 944.52b in 2020-21.

More reforms

The raging tensions on the outskirts of Delhi notwithstanding, the government signalled that it had no intention of blinking. It may put the rejig of the farm laws on temporary hold but would not walk them back. This message was implicit in the elaborate arguments by the FM in defence of its claim that it is “committed to the welfare of farmers”. In fact, the government is planning to expand the idea of one-nation-one-market (one of the sticky issues in the face off) by including another 1,000 mandis under e-NAM—the National Agriculture Market, a pan-India electronic trading portal.

Similarly, the FM hit the pedal with respect to liberalising the investment rules for foreign direct investment (FDI) in the insurance sector. The permissible FDI limit is to be increased to 74 per cent from 49 per cent — allowing foreign ownership of these companies with some guard rails.

In the final analysis it is clear that FM Sitharaman has hit the right notes with her third consecutive budget. Now, the trick is to implement the game plan once Parliament signs off on it.

But as the cliché goes it may well be a case of ‘anything well begun is half done’.

Anil Padmanabhan is a Delhi-based journalist who writes on the intersection of politics and economics. His weekly column Capital Calculus is published on Substack.