For a Budget that ushers in a reforms reset

Narendar Pani | Updated on January 19, 2020 Published on January 19, 2020

Reforms have not really expanded markets. Now, industry should be encouraged to tap into capital that doesn’t go overseas

Few Finance Ministers have had to make their Budgets in as challenging circumstances as Nirmala Sitharaman now faces. To be sure, there have been worse economic crises in the past. But these crises have typically provided an opportunity for Finance Ministers to establish reputations, as Manmohan Singh did in 1991.

But Sitharaman’s dramatic policy move of a corporate tax cut of more than ₹1.45 lakh crore a year has not even stopped the slowdown, let alone cause a noticeable upturn in the growth rate.

Her absence in the Prime Minister’s recent Budget discussion, in which a number of other ministers were present, may have been no more than a scheduling problem. Yet the doubts it has raised in the public mind about the confidence Prime Minister Modi has in her, do not make the task of working out the Budget any easier.

Uncertain times

In these difficult and uncertain circumstances the Finance Minister could understandably be wary of the path ahead. As is to be expected, there is no dearth of suggestions. Her widespread discussions would have made it obvious that there are two main remedies that the experts have to offer: boost consumption, and take dramatic steps in the reform process.

The trouble is each of these remedies is not without its risks. Finding resources to fund a major boost in consumption spending is not easy. Tax collections have, due to the slowdown and other reasons, been underwhelming. The largesse provided by the transfer from the RBI has largely been spent on the cut in corporate taxes. And the suggestion to allow the fiscal deficit to grow comes with the risk of inflation.

It is not just that the inflation rate is already hovering around the limit the RBI would like to keep it under. The contributors to the current phase of inflation also make the rate extremely sensitive to a boost in consumption spending of the poor. Food products are major contributors to current inflationary trends.

A much-needed spurt in the spending of the poor, as a result of budgetary support for programmes like MGNREGS, may come with the less desirable phenomenon of higher food inflation. And the impact on growth of such an allocation would be further impaired by the fact that the spending of the poor would not improve demand in sectors that are currently facing the brunt of the slowdown, like automobiles.

The option of continuing open market reforms also looks better on paper than it is likely to be in practice. At a time when demand is already depressed, inviting more foreign products would only increase the competition for the stagnant market, thereby making conditions even worse.

The limited opportunities in the Indian market are already showing signs of generating a negative response from foreign investors. Walmart, which was the public face of the move towards opening up the multi-brand retail space, has cut its jobs in India.

The time has clearly come for the Finance Minister to explore previously unexplored territories. And one area that has been taboo for most Indian discussions on the economy over the last three decades has been the reform process itself.

Is it possible that some of the measures that have been taken over the last three decades since the 1991 reforms have not quite worked according to plan? Is it possible that the strategy of simply opening up markets and waiting for growth to occur is losing some of its effectiveness?

There is no getting away from the validity of the fundamental argument Manmohan Singh made in his 1991 Budget speech for opening up the economy. As Indian industry began to compete with foreign-made products, or those made by foreign companies in India, they were forced to raise their own standards. The more successful Indian companies were then able to compete not just in the Indian market but in foreign markets as well.

The process was, however, largely concentrated in industries that were not employment intensive. The resultant jobless growth did not help the Indian market expand to levels that were predicted when liberalisation first began.

A lower-than-originally-expected demand contributed to the growth in foreign investment falling well below the levels reached in China.

And Indian investors, who have through the period of liberalisation learnt to compete in world markets, also have reason to consider investing in foreign markets rather than at home.

Regional exchanges

The Finance Minister thus needs to find new investors who do not yet have the option of investing abroad. This task may be difficult but is not impossible. She would recall that in the 1980s and 1990s several Indian business houses grew rapidly from very small beginnings to become major industrial houses. Indeed, many of the current industrial majors, from Ambanis to Infosys, were a part of that story.

Several of them, who were at that time known only locally, used regional stock exchanges to launch relatively small IPOs to raise funds. With the consolidation of all stock market activity in just two stock exchanges — BSE and NSE — in a single metropolis, this route has for all practical purposes been closed for small capital. The closure of this route has also limited the scope for the transition of agrarian capital into industrial capital. At a time when the proportion of investment to GDP has fallen, the finance minister must consider ways of reviving the trend of transforming dispersed small local capital into viable investments in industry.

She could consider setting up effective small cap stock exchanges at dispersed locations across the country. These exchanges would need to be allowed to help local firms, with appropriate credentials, to raise IPOs, even if they are relatively small in size. This would create a dispersed small cap market that would help boost investment by newly growing companies.

Over time some of these firms may grow into major players in the BSE and the NSE as happened in the past. This process will undoubtedly pose severe governance challenges, but it comes with the promise of a revival in investment.

The writer is a professor at the School of Social Science, National Institute of Advanced Studies, Bengaluru

Published on January 19, 2020
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