Budget 2021 must not undermine govt's response to the Covid-19 pandemic

Govt has so far been restrained and sensible in pandemic response. Budget must not throw away that effort

In a few weeks, Union Finance Minister Nirmala Sitharaman will rise to present what will inevitably be remembered as a pandemic Budget. Few Union Budgets will have been presented under such difficult circumstances, and will have been as enormously anticipated as this one will be. Ms Sitharaman will be under enormous pressure to do the impossible: Provide relief to farmers, consumers, households, and corporations; control spending and debt to prevent a ratings downgrade; and restore growth momentum following an unprecedented economic contraction.

So far, the government has been both restrained and sensible in its macro-economic response to the pandemic. Unlike some others around the world, it has understood that trying to stimulate demand during a public health emergency is counter-productive. It has been rewarded for its good sense by seeing the economy slowly return to normal on its own. Naturally, there will be long-term damage left by the lockdowns and by the pandemic itself. The question will be how the government can attend to and repair this long-term damage; but the simple fact also is that understanding the nature of this damage will take some time. Many sectors and interest groups will insist that they be prioritised in terms of relief or stimulus. All such demands should be treated like demands for priority in the vaccine queue: Dismissed summarily.

It is true that the finance minister has said, in a widely reported comment, that she will not allow the fiscal deficit to “worry her too much”. This statement has hopefully been over-interpreted to mean that Ms Sitharaman intends to turn on the spending taps. That would be a mistake. You can’t spend your way out of a pandemic like you can spend your way out of a slowdown. Even the latter, as India has discovered to its pain, comes with severe long-term costs. After all, Indian growth is still hobbled thanks to the mistakes made in responding to the 2008-09 financial crisis, particularly in terms of banks’ balance sheets. The finance minister should recall, as she listens to a universal chorus from industry and the pink papers demanding that she start spending and not worry about borrowing, that a similar chorus assailed her predecessors’ ears during the last crisis. The then finance minister made the mistake of giving in to the chorus, but the current one is, one hopes, less likely to choose a path that repeats the mistakes of the past.

To the extent that the government must increase spending and is faced with lower revenue, it must choose the more sensible road, a grand bargain with investors, citizens, and taxpayers. 

First, it must return to full-scale, transparent, privatisation. The time for piecemeal disinvestment is over. The point of privatisation is also to ensure that productivity gains take place in the privatised sector or asset. This is an important source of growth momentum and not just of funds.

Second, it must make all its borrowing, even off-balance sheet borrowing, as transparent as possible. Even as the deficit target is once again missed — in retrospect, wasn’t missing it last year self-inflicted harm for zero gain? — the commitment to greater transparency will allow for a clearer understanding of the subsequent deficit reduction glide path.

Illustration: Ajay Mohanty

Third, it must prioritise the inflow of global capital. So far the government has been satisfied with foreign direct investment numbers, although they are driven by big-ticket inflows into certain high-profile projects and companies. But what is needed is long-term capital entering India to relieve the financing burden on the government. Currently, the government monopolises financial savings in India, leaving very little for the private sector. A greater pool of global funds in India will reduce the dependence on Indian household savings to fund government priorities. There are many ways in which this channel for global funds could be set up. One is through green-rating various projects to incentivise the flow of new, ESG-focused funds. Another is through creating capacity for municipalities and public sector units to tap global debt markets. A third is through new, privately controlled development finance institutions that have a minority government stake and are focused on the various “champion sectors” that would otherwise be calls on the government’s purse one way or another.

Fourth, it must resist the temptation to open the welfare spigot. The experience not just in India but across the world has been that targeting has become particularly difficult during the pandemic. Meanwhile, poorly targeted relief tends to just get saved and not spent — this was the experience in the US, for example — with minimal effect for the broader economy. New schemes aimed at the urban poor can certa­i­nly be announced, but they need not be fully provis­i­o­ned for as yet, given that the economy has hardly ret­urned to normal and we do not even know what the post-pandemic “normal” will look like — and therefore how best to identify and transfer to the urban poor.

Fifth, ignore what the Western world is doing, whether its treasuries or central banks. Recently, a former governor of the Reserve Bank of India (RBI) quoted, in an article addressed to the finance minister, the academic high priest of the fashionable “modern monetary theory” cult that thinks inflation is imaginary. I was dismayed to see this, because it indicates that India’s tendency to immediately pick up on the worst intellectual currents in the rest of the world is alive and well. An RBI governor should surely know that, even if inflation has failed to return in the US and Japan in spite of high levels of spending, debt, and deficits, that has not been the Indian experience. We do not have the luxury of the relaxed approach to debt monetisation or deficit spending that OECD (Organization for Economic Co-operation and Development) countries appear to have decided on.

Sixth, remember that institutions matter. When planning for mammoth inflows, borrowing, and stimulus, how those flows of funds are administered, regulated, and reported becomes of crucial importance. The RBI’s independence, particularly when it comes to the management of the government’s debt and its inflation-targeting, is a giant asset in this domain and must not be diluted. Additional regulatory capacity must be built up to enthuse long-term finance.

Finally, promise to protect investors. We must recognise that our continued dependence on retrospective legislation and our fighting of international arbitration give the clear signal that India is a dangerous place to send your money. This is counter-productive. By listening to greedy tax officials, policymakers are giving up pounds of investment for pennies of tax revenue. The time has come for a clear commitment to neither use nor follow up on retrospective claims, and another clear commitment to accept the results of international arbitration. The government must also re-examine its investment treaties to ensure that investors have an alternative to the slow and sometimes compromised Indian legal system. 

The simplest route for the finance minister would be simply to say: “there’s a recession, it’s a special case”, and to raise deficits and debt to frightening levels in an attempt to satisfy all the demands on her. A more focused, smarter approach would be to use this opportunity to find alternative sources of development finance for India, and to make it more investment-friendly. Two roads diverge, and the government must pick the right one.

The writer is senior fellow, Observer Research Foundation