Finally, getting down to the brass tacks in a budget

budget

The Economic Survey tabled in Parliament on the eve of the Budget presentation, offers an unexpected narrative of the Indian economy. It is a sobering document much in tune with the situation we find ourselves at this juncture. It needs to be read carefully, for its messaging is, I come with a critique and not to praise it. The Chief Economic Advisor deserves kudos for that. Naturally there are obligatory statements about India shining, even as the global economy remains subdued. And indeed at the macro level, we have done well with high real GDP growth and a macroeconomy that is approaching $4 trillion.

On understanding complexities

For a Survey of its breadth and depth, there are many things one can pick on, but none as quickly as the courageous statement that suggests that ‘few people outside government (living or dead) can understand the complexity of governance in India’ The complexities relate to economic, cultural, geographic, regional and others. Arguably, even within government the understanding of this complexity could be rare. For if such complexities were understood in their entirety, the government would eschew the temptation of making palpably unattainable promises and policy makers would push back against such targets.

I am speaking of doubling farmer’s income in five years, increasing employment by 20 million and achieving $2 trillion worth of exports to name just a few. These are obviously political statements and acumen would demand they be appreciated as such. To however, mask the weaknesses of the economy, whether these are structural or cyclical, internal or external, self-inflicted or circumstantial and attribute the challenger’s narrative to a lack of understanding is disingenuous at best and an attempt to divert at worst. It is also unkind to the intelligence of academics, sociologists and economists, historians and demographers among others who spend their time engaging in deep and meaningful research of India and its peoples.

The Cambridge economist Joan Robinson who visited India for only a few days but worked on the Indian economy for several years had famously said that whatever you say about India at a point in time, the exact opposite is also true at the same point in time. Many people within and outside government have quoted Joan Robinson no doubt because they agree with that assessment.

Economic Survey leads to budget’s core theme

Notwithstanding, I feel this year’s Economic Survey has played a crucial role in identifying the several difficulties that confront the Indian economy. Primary among these has been the slow employment creation especially in the formal sector even in the face of fast GDP growth.  The corporate sector has not only done well, but is ‘swimming in profits’. A high growth economy in which 800 million people receive some sort of food subsidy is neither economically nor politically sustainable is the message that is loud and clear in the Survey and to my mind it was the focus of the Finance Minister Nirmala Sitharaman’s first budget in this election cycle.

A thrust for employment creation is writ large in both the Survey and the budget. Development of industrial parks close to cities, reenergizing the smart cities program, bringing back the focus on transit oriented development (ToD), creation of urban rental housing and dormitories are examples of proposals that are aimed to encourage labour intensive manufacturing, possibly the only sensible way to address India’s employment challenge.

While the Production Linked Incentive scheme is being reinforced by increasing allocations to sectors such as semiconductor and pharmaceuticals, the budget has buttressed this by an employment linked incentive scheme, or ELI.  The government will provide monetary incentive while the corporate sector would have to train interns or the youth entering the labour market for the first time.  Corporate funding is recommended from their corporate social responsibility pool. This comes on the back of an earlier not so successful scheme to encourage labour intensive employment where the government paid part of the provident fund contribution to first time employees in certain sectors.

Multiple channels of enabling job creation

The current internship scheme that seeks to train 10 million youth in five years has the potential to unleash the energy of youth in the companies they are placed in. It could create multiplier effects but the proof will naturally lie in the quality of implementation and the keenness of the corporate sector. The job creation agenda is also visible in the proposals to develop religious tourism and tourism in general in the eastern part of the country. Tourism is a labour intensive activity.

The enhanced allocations for MSMEs under the Mudra scheme, especially labour intensive manufacturing is another reflection of the focus of employment. The principal message in this budget is to double down on skill and job creation, including for women. The responsibility of this agenda has been placed squarely on the profitable shoulders of India’s private sector. It is interesting that the budget speech did not mention public sector employment, which has remained an aspiration, especially among rural youth. The employment goal will perhaps reverberate and resonate in policy circles for the next five years in this election cycle.

 Getting rid of process clutter

Simplifying processes in India is work in progress. This budget moves the needle on that. Simplifications have been proposed in tax administration as well as in the bankruptcy code. It is a common occurrence in India that resources, whether tax revenues meant for the government or debt recovery for creditors, these get stuck in endless litigation because of our complex procedures resulting in deadweight losses.

Simplification is therefore a welcome step and will get a further boost as the government finalises the economic policy framework in the next six months. These next generation reforms seek to cover all factors of production, namely land, labour, capital and entrepreneurship, and use technology as an enabler for improving total factor productivity and bridging inequality. Effective implementation of several of these reforms requires collaboration between the Centre and the states and building consensus, since development of the country is inextricably linked with development of states.

Federalism, cooperative and otherwise

The competitive and cooperative federalism that was the hallmark of several budgets between 2014 and 2019 has remained on paper except for the implementation of GST, which according to Arvind Subramanian, former CEA, was a monumental achievement in cooperative federalism. The Survey too emphasises the need for harmonisation across levels of government and across different policies between and within sectors.  Agriculture has been mentioned as a case in point in which subsidies to water electricity and fertilizers coexist with minimum support prices and export bans from time to time. These policies conflict and create rents, damaging the economic fabric. Inverted duty structures are also prevalent, creating policy conflicts that the FM has promised to address in the next six months.

A budget to counter narratives 

The fiscal consolidation agenda remains on track with a windfall from the RBI and higher than expected tax revenues. The middle class have received a little respite in tax liabilities but those investing in stocks and other assets will have to pay long-term capital gains of 12.5%. Incentives for the poor, tax breaks for the middle class and additional taxes for the rich in the budget seek to moderate the narrative that the rich are getting richer while the poor are finding it difficult to catch up.

The budget is however only a start. It is not taxing the rich more that will address the problem. As Joseph Schumpeter observed, the market's achievement does not consist in providing silk stockings for queens but in bringing them within reach of factory girls. And the only way that can happen is to create productive employment opportunities for India’s burgeoning youth, including women. The budget has made a start. Now, for the follow through.