More than macroeconomic numbers like fiscal deficits, outlays and revenue targets, we can get a good sense of the Budget by looking at the tax rates. If there are new or higher taxes, or more complicated tax rules, it is usually a bad Budget. If there are lower taxes and compliance simplified, it’s a great Budget. And if, like the Budget Finance Minister Nirmala Sitharaman presented Monday, where the taxes remain unchanged amid an attempt to simplify their administration, then it’s a decent Budget. Considering that the Narendra Modi government does not intend to raise direct taxes amid the additional spending in the wake of the Covid-19 pandemic, by the tax-rate yardstick, we can grant that it is a fairly good Budget.
Asset creation over cash transfers
The Budget aims to regain a high growth trajectory through greater investment in both hard and human infrastructure: more public funds for roads, railways, ports and agricultural infrastructure; and for public health, education and science. In doing so, it consciously chooses to invest in creating multi-generational public assets than spend it on cash transfers and direct subsidies. For instance, even as a number of measures to upgrade rural infrastructure have been introduced, outlays for MGNREGS and PM-KISAN have been reduced. The infrastructure route to growth is a far better one. To be effective, it must be sustained over several years. (We should count the outlay for a nationwide Covid-19 vaccination programme as an investment in human capital.)
But if taxes remain more or less the same, where will the government find the money to finance all that infrastructure?
Budget 2021’s answer to this question is a combination of borrowing and selling/leasing government land and public sector units. An atrociously drawn but useful chart in the Budget highlights tells us that 36 per cent of the government’s revenues come from borrowing; and 20 per cent of its expenditure goes towards repaying loans. In fact, borrowing and debt repayment are the biggest items in the income and expenditure, respectively. These numbers will rise in the coming years and rising government debt has adverse effects on the economy. However, it’s helpful to look at government debt as borrowing from your children and grandchildren. If you spend the money on yourself, you will be burdening them for your benefit. If you spend it on roads, bridges, hospitals and fibre-optic cables that they can inherit, then you are merely sharing the costs with them. So fiscal deficits and debt financing are not a bad thing to the extent that they are employed for multi-generational infrastructure creation. It remains to be seen how efficient the public expenditure in infrastructure really will be, and whether India’s whimsical governments, byzantine processes and politics of spoils allow the allocated money to be spent, and spent efficiently.
Borrow but grow faster
Even so, you cannot borrow limitlessly even if it is all for infrastructure. According to economist Evsey Domar, for government debt to be sustainable the economy should grow faster than the debt, and the real growth rate must be higher than the real interest rate. Since raising taxes during a slowdown and a pandemic shock would be counterproductive, selling off public sector units and land holdings becomes an important alternative. These are the right things to do, but achieving them will be a heroic project. Even the Modi government’s own record of achieving disinvestment targets is unremarkable, and the very idea of selling or leasing land is bound to trigger resistance within the government and scandal without. To achieve disinvestment targets, the Modi government will have to demonstrate unprecedented transparency, rectitude and a commitment to equity.
The government has tried to balance the books in two other ways: holding steady or cutting back expenditure in some areas, and levying a cess on fuel. The outlays for defence, for instance, have not increased despite the significantly higher and long-term threat perceptions. If the Services do not come to an understanding on prioritising capital investment, especially for the Navy, India will either be less capable of dealing with China in the future, or compelled to make emergency purchases of ships, submarines and missiles. It is incumbent upon the Chief of Defence Staff and the three Services to both overcome inter-Service rivalries and take a hard look at how they want to assign the limited funds.
The cess on fuel will pinch in both urban and rural areas, keeping the pressure on the household budget. In the absence of cash transfers and additional support, there is a risk that consumption growth will be anaemic, jeopardising economic recovery. The budget articulates measures to help entrepreneurs, expand businesses, fix banks and improve corporate lending. What it lacks is a plan to make people spend more. But I guess tax cuts for the middle class and unconditional cash transfers for low-income households are too much to ask for, especially at this time.
The Atmanirbhar narrative was big in this Budget, but it is here that the danger lies, because the sentiment of self-reliance is seductive and popular. Yet, it is India that showed the world how closely openness and prosperity are linked after the 1992 liberalisation unleashed the country’s growth trajectory. Closing doors to free trade will not create self-reliance, but merely enlarge the rent-seeking, uncompetitive crony class. It will not create wide-spread prosperity either, and instead concentrate wealth into the hands of those who can game the system. And it will leave the poorest worse off, forcing them to spend their meagre earnings on relatively more expensive products.
The Modi government would do well to stay away from the failed economic policies of the Indira Gandhi and Morarji Desai governments, and find a different route to Atmanirbhar Bharat.
Nitin Pai is the director of the Takshashila Institution, an independent centre for research and education in public policy. Views are personal.