Budget making in times of complex constrained optimisation

The budget has the potential to be a catalyst for transformative growth.

In an ideal world, policy making would be a dynamic, continuous process, untethered from the constraints of fiscal calendars and budgetary cycles. It would deftly navigate the intricate dance of trade-offs, balancing short-term priorities with long-term goals, all while acknowledging the complex realities of political economy.

However, in the real world, public finance management is a far more nuanced and multifaceted beast, necessitating the use of sophisticated analytical tools like constrained optimisation to manage the inevitable trade-offs.

This is precisely why the Union Budget is far more than a mere financial report card; it serves as a powerful signalling device, capable of unleashing a cascade of positive sentiment among entrepreneurs, investors, and businesses.

Unleashing animal spirits

As Finance Minister Nirmala Sitharaman navigates the complex landscape of budgetary constraints, she must also prioritise sending a clear, unequivocal signal to stakeholders that the government is committed to investment-led growth.

By doing so, the government can awaken the dormant "animal spirits" that have been sluggish in recent times, and create a virtuous cycle of fresh investments, innovation, and job creation.

The budget, in essence, has the potential to be a catalyst for transformative growth, one that prioritises entrepreneurship, innovation, and job creation, and sets the stage for India's continued ascent on the global economic stage.

So, what can the Finance Minister do to unleash the animal spirits? Firstly, the budget should not show any signs of let up on investments in infrastructure, which is critical for boosting economic growth and competitiveness.

This includes allocating sufficient funds for projects such as roads, railways, ports, and airports, as well as incentivising private sector participation through mechanisms like public-private partnerships (PPPs). How much the finance minister pencils in the capital expenditure column will be keenly watched.

Jobs, skills, and more jobs

Secondly, the budget must prioritise investments in human capital, which is critical for driving innovation and entrepreneurship. This includes allocating sufficient funds for education and skill development initiatives, as well as incentivising private sector participation in these areas.

In the first budget of this government’s current term presented in July last year, there was a clear focus on creating jobs. The budget introduced three new employment-linked incentive schemes as part of the Prime Minister’s package, aligning with enrolment in the Employee Provident Fund Organisation and focusing on first-time employees.

Additionally, students who have not yet benefited from any government schemes will receive support loans of up to Rs 10 lakh for education in domestic institutions, with e-vouchers for interest subvention provided to 1 lakh students each year.

It is critical to raise the level of intensity on this focus in this budget, too. This would show the government’s acknowledgement about the creating jobs for the armies of hopefuls for years on end as a high priority area.

Importantly, such an approach involves the corporate world, which, by corollary makes them an active participant in the government’s primary policy focus area at a time when India stands at the precipice of a transformative era, necessitating a multifaceted approach to navigate the complexities of its evolving workforce.

Managing transitions

The budget can provide the right policy framework to manage three pivotal transitions to propel the country towards sustainable growth and development. The first transition involves the migration of workers from the agricultural sector to non-farm industries, a classic conundrum plaguing developing economies. This shift is crucial for enhancing productivity and driving economic growth.

The second transition entails the formalisation of the employment landscape, where an increasing number of jobs are brought under the umbrella of the organised sector. This would not only provide workers with better job security and social protections but also facilitate the extension of social safety nets to a larger segment of the population.

The third and most critical transition involves imparting the multitude of youth joining the job market every year with the skills and competencies required to succeed in an ever-evolving economic landscape. This would entail emphasising the development of 21st-century proficiencies, such as critical thinking, creativity, and adaptability, to enhance their employability and future-readiness.

These, along with the ongoing focus on recalibrating curricula, pedagogies, and foundational learning systems through the National Education Policy (NEP) to equip students with the skills and knowledge necessary to thrive in an increasingly complex job market, are necessary force multipliers for achieving broader medium term economic objectives.

Budget making in these times can be a complex constrained optimisation exercise with goals that are not just limited to fiscal math and fund allocations, but also moving lighting the focus on a longer horizon.