Opinion

Short on stimulus, long on reform

Himadri Bhattacharya | Updated on February 03, 2020 Published on February 03, 2020

The Budget does not reveal any major capex proposal. However, its focus on detail in the rural economy is to be welcomed

Traditionally, the presentation of the Central government’s annual Budget is an occasion to conjure up the image of a mythical wish-fulfilling tree for an average Indian. To some, the Budget is expected to deliver what dreams are made of. It was no different this time. However, there was some serious and urgent business the government needed to attend to in its second Budget in about seven months. A widely-shared view had been gaining ground for a time that the Budget for 2020-21 needed to spell out a clear and coherent strategy to tackle the abrupt slowdown of the economy in 2019, although incipient signs of this have been available since 2017.

The equity market has given the Budget a thumbs down, as it did not find the proposals providing adequate stimulus to investment and consumption needed for a quick growth turnaround. Be that as it may, it is still apposite to evaluate the Budget by applying a dispassionate and objective yardstick. Since the current dismal growth performance has provenance in both cyclical and structural factors, a useful approach in this regard would be to see how the Budget addresses them.

Counter-cyclical measures

Regarding fresh investment, the Budget does not reveal any big capital expenditure proposal, apart from the ones already been announced — such as the ₹103-lakh crore five-year infrastructure spending plan, for which a pipeline of 6,500 projects have been identified, or the ₹25,000-crore corpus for salvaging stalled but viable housing projects.

From the tone and tenor of the Economic Survey and the Budget speech, it is apparent that the government’s priority is to take those policy measures that will clear the way for an early commencement of the next cycle of vigorous private investment, leading to, among other things, job creation. For spurring consumption, it is making available ₹40,000 crore in the hands of taxpayers, which is about 2.4 per cent of the net tax receipts in 2020-21. Both the taxpayers and the equity market expected more tax cuts; hence, the debate on whether this amount was too small to have any meaningful impact on consumption will continue for a while. However, an aggregate outlay of over ₹20 lakh crore for agriculture and rural development will be positive for rural income and consumption.

The sufficiency, or otherwise, of the Budget measures needs to be understood from a global context as well. Signs of vulnerability of the global economy are writ large: as per the IMF’s estimate, the global growth in 2019 was 3 per cent — the lowest rate since 2008-2009. The impact of the Coronavirus will be an added headwind this year. The World Economic Forum in its Global Risk Report 2020 has observed: “The global economy is at risk of stagnation. Rising trade barriers, lower investment and high debt are straining economies around the world. The margins for monetary and fiscal stimuli are narrower than before the 2008-2009 financial crisis, creating uncertainty about how well countercyclical policies will work.”

Structural reforms

In India, the counter-cyclical monetary easing that began in February 2019 has most possibly come to an end. By the RBI’s own admission, more structural reforms are now necessary.

In the Budget documents, the government has cited the introduction of the IBC and the GST as the two structural reforms accomplished. Both these path-breaking reforms are in their early years, and going forward, they are likely to enhance the long-term growth potential of the economy. But evidently, there are quite a few major structural bottlenecks remaining. The Budget addresses a good number of them, the quality of which could be roughly gauged by taking a look at the policy measures for the rural agricultural economy and human resources development.

While the contribution of agriculture and allied activities in the GDP is close to 15 per cent, roughly about 50 per cent of the country’s population is dependent on this sector. The other structural feature of agriculture is that productivity is low — crop yields in India have been 20-40 per cent lesser than their global averages for a long time now. The downside of a disproportionate number of people being dependent on agriculture has been brought into a sharp relief of late: the burgeoning construction activities in urban areas in the recent decades provided employment to a large number of persons from rural households, sustaining aggregate demand and consumption in the economy and also spurring retail lending in the rural and semi-urban areas. Come the liquidity crunch for NBFCs in the wake of the IL&FS default and large-scale abandonment of housing projects, the income of rural households dropped, and there are no signs as yet of its reversal.

The Budget has taken a number of steps to augment off-crop income in a sustainable way, viz solar power generation and fish-farming. One reason for the low crop-yield in India is its relatively small plot size. While the proposal for enactment of laws by the States to permit leasing of agricultural lands and contract farming could be a solution in this regard, it is doubtful how many States will have the political will to do this.

We have been told that by 2030, India will have the largest working-age population globally. But the fact remains that the quality of education and skillsets of young graduates, barring those from a handful of institutions, continue to be poor by any standard. The Budget proposals for a bigger role for the private sector together with the emphasis on skill development are welcome, but the outlay for human resource development at ₹99,311 crore is too meagre, keeping in mind the preparations needed in the run-up to 2030.

Financial sector reform

The Economic Survey has prepared a good analysis of the performance of PSU banks and the problems afflicting NBFCs. The significant risk aversion currently evinced by PSU banks, despite their comfortable liquidity position, should not come as a surprise in the light of some very insightful empirical research done at the RBI a few years back, establishing the behavioural fact that at times of high NPAs, banks are averse to making fresh loans.

While one would like to await the announcement of measures for enhancing the governance, professionalism and efficiency of PSU banks, as promised in the Budget, it must be pointed out that nothing but a set of thoroughgoing reform measures giving full autonomy to boards in matters of strategy and business operations, including hiring of and fixing compensation for staff at all levels, will work. The half-hearted and half-baked measures of the past have not been meaningful.

The proposal to amend the Banking Regulation Act to give more oversight powers to the RBI in respect of cooperative banks is welcome, so is the step to allow non-resident investors greater access to government securities and corporate bonds. The latter will pave the way for Indian debt securities to be included in global indices. A long overdue reform is finally happening — enactment of a legislation to enable the netting of financial contracts.

Through The Billion Press. The writer is a former central banker and consultant to the IMF

Published on February 03, 2020

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