Sunday, 22 May, 2022
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Indians deserve a Budget that strikes at structural deficiency, not just tinkers at the edges

Cash transfers to rural voters or tax breaks to India Inc can’t be a lasting solution to the woes of Indian economy. It needs structural reforms.

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The frenzy over what the government will come up with in Budget 2020 takes the attention away from larger questions. The adjustment of tax slabs, the privatisation of state-owned enterprises, and the announcement of massive increases in public expenditure may help revive the animal spirits of investors and the capacity of consumers to spend. But it may not address the underlying reasons for India’s growth slowdown. The ongoing slump is structural in nature, and therefore demands structural solutions.

Despite the recent reduction in forecast growth, India remains one of the faster-growing economies in the world, experiencing a rate of growth above that of other emerging market and developing economies, above the worldwide average and well above that of the advanced economies. Why then is India’s slowdown perceived as a crisis? The answer lies in two contrasts.

The first contrast arises out of the gap between India’s actual need for growth to meet people’s aspirations and the existing growth rate. In recent years, the Indian economy has not generated enough jobs, even when growth rates were high. So how well can it be expected to do so today?

The second contrast arises from the gap between the growth aspirations of capitalists and the actual growth of the Indian economy. Due to slowing demand, unwarranted optimism has led to a massive investment and debt overhang. The problem of non-performing assets (NPAs), which also has roots in political favouritism in the banking system, has been accentuated by weak macroeconomic conditions. Large investments that would have been viable in better circumstances are no longer yielding results. It is for this reason that even those who are otherwise hawkishly opposed to all government deficits favour a sizable government stimulus programme.

Thus, the rate of growth has not been sufficient to meet the aspirations either of India’s common citizens or industrialists.

Also read: Nirmala Sitharaman’s Budget has to present credible numbers, and commit to fiscal prudence

Deeper concerns

The slowdown in the rate of growth may have been accentuated by demonetisation and by the subsequent disastrous implementation of the Goods and Services Tax (GST), but the ultimate reason for the slump lies deeper. India’s pattern of growth has remained one of pockets and islands, from which spillovers have been limited. These pockets and islands are unable to provide aggregate demand on the required scale. One source of evidence is the stark increase in inter-state inequalities in India, with the richest state now having a per capita income ten times that of the poorest state. Inequalities of this size are rare in any country.

By way of contrast, the poorest US state has a per capita income around 60 per cent that of the richest. The ratio is four to one in China. Even in Brazil, one of the most unequal countries in the world, the ratio is less. Stark inequality of income between the urban and the rural sector is another measure of the structural inequality hindering India’s growth. Within the leading states, a few dynamic urban pockets are the centers of economic prosperity. This stems disproportionately from globalised services, which are the most important component of India’s exports. In contrast, the poorer parts of India remain focused on agriculture and extractive industries.

Also read: Truth be told, Modi’s budget won’t solve India’s economic crisis

Neither Make in India nor Make for India

The success of Indian manufacturing remains limited and is confined to a few specific segments. The Modi government’s ‘Make in India’ slogan remains a mirage and even more so that of ‘Make for India’. The speculation that the government will introduce tariffs on imported manufactured goods or even impose restrictions on what travelers can bring from abroad, is a paltry recognition of this fact – and one which confuses the symptom and the cause.

Moreover, no quantity of cash transfers aimed at rural voters, however appealing to politicians, can overcome the underlying problem, which has its roots in the low productivity of vast sectors of the Indian economy, including most areas of manufacturing and much of agriculture. This is precisely the reason why India has not been able to take advantage of the US-China trade war and rising manufacturing costs in China, which have led to a shift in manufacturing away from it.

A sensible government strategy to deal with the current economic malaise shouldn’t just influence the budget, but also go beyond it. It must have as its vision to widen the circle of inclusion in the productive economy by bringing opportunities to people and enhancing their skills. This requires widely-distributed and sound investment. A strategy of this kind would, for instance, reverse the neglect in the last three decades of investment in rural infrastructure and services for agriculture, as well as substantially increase investment in basic and vocational education and training. Such initiatives have long gestation periods, and can only be successful if they are based on cooperation between the public and private sectors. But it is not too late to begin.

An investment-oriented strategy for national development would not only aim to make widely distributed, but also focused and effective interventions that can raise the productivity of workers in geographical sites throughout the country. Such an approach requires financial support as well as scrutiny of the quality of the investment programmes everywhere.

In many parts of India, there has been a focus on prestige projects (such as the re-development of cities) without a recognition that investment is a crucial variable in creating a more democratised market economy. Such investments (for instance, in providing agricultural extension services, local irrigation, vocational education or universal broadband), although crucial, are often not directly profitable to the private sector, and therefore require a supportive government role.

Also read: From Wish Town to lost hope, how India’s ‘Achche Din’ dreams lie shattered


A stimulus programme capable of underpinning productive inclusion would focus less on giving tax relief to corporate houses, as the government recently provided, and more on bolstering the kinds of productive investment that empower people on a widespread basis.

Such an investment effort is ultimately neither on the ‘supply-side’ nor on the ‘demand-side’. It is both. A widening circle of productive inclusion removes constraints to supply and thereby fosters demand, in a virtuous and uplifting spiral. A budget that tinkers, and fails to address the structural deficiency at the heart of India’s economy, cannot overcome the true sources of the malaise, nor give India’s people the breakthrough they deserve.

The author is an Economist at the New School for Social Research, New York. Follow him on twitter @sanjaygreddy. Views are personal.

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  1. Fundamentally budget is about revenue and expenditure how and how much government exp cute to earn…….over how and how much it plans to spend.
    Apply the layer of “economic and social need” over this exercise and it becomes a macro economic tool.
    If Modi governments track record is anything to go by budget it will tinker around the edges for sentimental effects and keep structural changes out of budget exercise.
    Congress made budget a voter gift-distribution event for political reasons. So people will expect out of habit
    As detoxification wears off and economy recover to 7-8% growth rate……there is nothing much this budget can or should do except maintain the course.

  2. Nice article! I hope GoI does breakaway from the normal routine and lay out the plans for economic reforms needed for next 20 years.

  3. The article raises a very pertinent observation but fizzles out over the details. While everyone does focus on immediate issues concerning the budget relating mostly to tax reduction and income transfer/support for the poor, various structural reforms are talked more in general terms than specific ones and are finally left out to be formalized by the policy makers. What we need is to dismantle the economic administration and management structure inherited from Nehru Indira days and make India a truly ‘minimum government, maximum governance’ country, where government will take care of the poor but will allow private players full freedom to grow but will extend required support for it. Specific objectives with which government can work could be say, achieving zero trade deficit with China in next 3 years, getting out of all PSBs and PSUs in next 5 years, abolition of all subsidies and merging them into DBT etc.etc.
    It is for the PM to announce this as his economic vision for the country, use his political capital to hard sell it and then leave his government to implement it. Sooner he does it, the better it is for the country. .

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