Budget and the Elephant in the Room

If we don’t change our direction, we are likely to end up where we are headed.

Published: 07th July 2019 04:00 AM  |   Last Updated: 07th July 2019 07:44 AM   |  A+A-

Nirmala Sitharaman

Finance Minister Nirmala Sitharaman. (Photo | Shekhar Yadav, EPS)

If we don’t change our direction, we are likely to end up where we are headed. This sage counsel of an old Chinese proverb merits the attention of politicos. The good news is that Budget 2019-20 is a do no harm budget — one that inflicts no new pain on the economy. What is disappointing is that it does little to alleviate existing pain. The causatives — inherited and exacerbated — demanded a bold approach. The context called for a glide path for a renaissance. A renewed mandate afforded an opportunity. The budget, though, is riveted by status quoist incrementalism.   

The elephant in the room is the size of the government and expenditure management. This financial year the government will spend Rs 7,633 crore a day. It will earn Rs 5,705 crore per day — including disinvestment proceeds which are effectively circular trading of public assets (Peter Buys PSU, Pays Paul to Plug Deficit bit.ly/27PSUs). To bridge the gap between expenditure and income, the government will borrow Rs 1,928 crore per day or roughly Rs 80 crore per hour. Topping the expenditure budget is interest payments—Rs 1,809 crore a day. 

Can an economy sustain growth with nearly a third of its revenue being deployed towards interest payments? The 2014-15 budget announced the government’s intention to modernise expenditure management by setting up a commission under Bimal Jalan. The report of the commission is not public and it is unclear if any of its recommendations have been adopted. The irony is that in 2018-19, Bimal Jalan along with Rakesh Mohan were asked to decide how much of the RBI’s reserves could be transferred to the government. Even that hope of a windfall is now trapped in a debate on how much and how! 

Lack of resources results in poor funding of critical sectors.  Agriculture is India’s largest employer but accounts for less than 14 per cent of GDP. In effect half the workforce lives on a sixth of national income. Agrarian distress is about returns from land and calls for policy reforms and investment in technological solutions. Yes, the allocation for agriculture has gone up from Rs 67,800 crore last year to Rs 130,450 crore—but of this Rs 75,000 crore is for a sop called the income support plan.  

The water economy is in an unprecedented crisis.  The allocation for the water resources department has gone up by Rs 632.73 crore. The allocation for the drinking water and sanitation department tasked with delivering piped potable water to rural households has gone up from Rs 19,992.97 crore last year to Rs 20,016.34 crore — that is, by Rs 23.37 crore. Yes, water is a state subject as is agriculture. But do states have the resources?

Propelling growth could deliver much-needed resources. The Economic Survey cited international experience to argue that growth can only be sustained by “a “virtuous cycle” of savings, investment and exports catalysed and supported by a favourable demographic phase”. The question is whether and where the budget, in its approach and allocations, scripts a playbook.

The necessary condition for triggering the ‘virtuous cycle’ of higher savings and investment is higher demand and consumption. That consumption is tapering into a trough is manifest in high-frequency indicators such as corporate filings, ranging from FMCG companies to auto manufacturers—and then there is the output and gross value addition data put out by the government for 2018-19.  

The slowdown is about money. As Nobel laureate Kenneth Arrow has often averred, the economy needs to be oiled by “a flow of money and flow of credit”. The gap between spending to hire/buy/produce and earning is bridged by credit. The credit train—banks which aggregate savings and non-bank finance companies which are the capillaries of credit delivery for consumption — is stranded between liquidity and solvency. 

It is not that the crippled state of the financial sector is unknown. And there is acknowledgement in the budget. There is the curious proposition of a government guarantee to public sector banks to buy high-rated assets from NBFCs when the issue haunting lending is stressed and stranded assets. Yes, there is the promise of `70,000 crore for recapitalisation of banks, which is good but not adequate, given the magnitude of bad loans in the system. 

There is much applause for the idea of a sovereign bond — the fact is foreign investors already have the opportunity to buy into quasi-sovereign paper and reap higher returns. Yes, it will create room for private borrowing, but the idea of raising dollar resources to fund general government rupee expenditure and deficit rather than a specific objective is problematic.  

Finance Minister Nirmala Sitharaman quoted the eloquent Pisirandaiyaar’s advice to King Pandian, that a few mounds of rice harvested from a small piece of land would be sufficient for an elephant, and asked, “but what if the elephant itself enters the field and starts eating?” The fact is the elephant called the government is doing exactly that. Success in attaining the goal of a $5-trillion GDP by 2024 rests on the efficiency of government spending. The bard’s advice on taxation merits application on expenditure too.

shankkar.aiyar@gmail.com

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