Budget and macro challenges

There is little in the Budget to provide the necessary growth impetus to take the economy to $5 trillion

In my column last month (“Confronting macro challenges”, Business Standard, June 13, 2019), I had outlined the ominously negative trends in nearly all the usual indicators of India’s macroeconomic performance (growth, investment, employment, inflation, external balance and fiscal position) and suggested a broad strategy to counter these trends. It is heartening to see that most of my diagnosis and prescription is reflected in the government’s latest Economic Survey, published last week. Unfor­tunately, I cannot claim the same degree of congruence with Finance Minister (FM) Nirmala Sitharaman’s Budget. Let me illustrate with some elements of my recommended strategy: Fiscal policy, trade and exchange rate policy and an investment-promoting reforms thrust.
 
Fiscal policy
 
To begin with the positive, FM merits warm congratulations for holding the line on the Budget’s fiscal stance of 3.3 per cent of GDP deficit, marginally lower than the shown number of 3.4 per cent for 2018-19. This despite the many calls from industry— and quite a few fellow economists— for a higher “fiscal stimulus”. With the combined (Centre plus states) deficit around 7 per cent of GDP, and a public sector borrowing rate of about 9 per cent of GDP, she seems to have rightly decided that there was plenty of stimulus already in place and a higher fiscal deficit risked crowding out already flagging private investment and further raising our high government debt-to-GDP ratio.
 

illustration: Binay Sinha

Of course, the Budget numbers can be, and have been, questioned on the grounds of significantly optimistic assumptions regarding growth in tax revenues (especially GST) and disinvestment receipts, and underfunding of expenditure needs. However, even if the final outcome creeps up to 3.5-3.6 per cent of GDP, it would be a significant improvement on the underlying 4 per cent experienced in 2018-19, once one corrects for the massive recourse to off-budget expenditure/borrowing resorted to late in 2018-19. Unless, of course, the sins of the previous year are repeated again!
 
Trade and exchange rate policy
 
Everybody rightly wants national economic growth to revive swiftly from the latest 5.8 per cent recorded in 2018-19 Q4. The Economic Survey projects recovery to 7 per cent in 2019-20; the FM is reported to be aiming for 8 per cent. The hard truth is that no sizable country has sustained 7 per cent plus economic growth without rapid growth of exports. Our goods exports have been stagnant in dollar values for the past six to seven years, with their share in GDP declining from 17 per cent to 12 per cent last year. This at a time when exports of Bangladesh and Vietnam have been booming. Despite this festering near crisis, the closest reference I could find in part A of FM’s speech to exports was half a sentence alluding to the importance of global value chains for India (para 37). And in Part B, the motivating  para 133 for her customs duty proposals is blatantly protectionist with no mention of exports at all!
 
In fact, this Budget builds on the unfortunate precedent of the 2018 Arun Jaitley Budget, which seriously reversed a quarter century of sustained customs tariff reductions “towards East Asian levels”. In this Budget also, the current FM has increased duties on some chemicals, plastics, paper products, ceramics, steel and metals, electronic goods and automobile components. Ministers and officials do not seem to appreciate the well-established trade and development lessons of the last 70 years, which demonstrate that (a) higher customs duties hurt exports, and (b) also damage the competitiveness and efficiency of domestic industry. How can we foster FM-commended global value chains when our import tariffs go up and down like a yo-yo?
 
A far better and more effective instrument for promoting both exports and import-competing domestic production would be to reduce the current over-valuation of the rupee. It is no accident that our export growth and industrial expansion were most robust between 1992 and 2010, when government and the Reserve Bank collaborated closely to monitor and prevent prolonged periods of such overvaluation.
 
A significant proposal in this Budget is for the government to issue sovereign bonds, denominated in foreign currencies, to help fund the Centre’s budget deficits. Global experience across developing nations suggests that it would increase our vulnerability to external uncertainties and reduce our economic sovereignty.  That is why this old proposal, repeatedly examined in the finance ministry over the last three decades, has always been rejected—until now. Another negative would be that such foreign borrowing (to finance domestic governmental needs) would tend to further strengthen the rupee, thus damaging exports and import-competing domestic production. It is ironic (and sad) that a swadeshi government is so keen to borrow in foreign currencies, on commercial terms, to fund its rupee expenditures.
 
Investment-promoting reforms thrust
 
Given the lack of headroom for fiscal stimulus and the likely weakness of expansionary monetary policy in the current context of fiscal dominance and widespread balance sheet stress across companies and financial intermediaries (banks and non-banks), I had argued last month that “the best way to trigger higher private investment and growth is to launch a much-needed set of economic reforms”, including “measures to overhaul labour laws and regulations to make them simpler and incentivise fresh employment in the organised sector; initiatives for easier land acquisitions for non-farm uses;  a big push on agricultural marketing reforms and an overhaul of the costly and distortionary public foodgrain procurement and distribution system…”.
 
Alas, there is no such “big bang” reforms package in this Budget. Yes, there are quite a few small improvements proposed across a wide range of sectors and areas, but nothing that would cumulate to a game-changing boost to “animal spirits” that would spur markedly higher levels of private investment and growth. It’s nice to pose the target of a  $5-trillion economy by 2024 and an implied 8 per cent plus average sustained growth. But reaching such targets requires the hard work of devising and implementing the right policies in a coherent and coordina­ted way. Without these, our growth may muddle along at the current, unsatisfactory 6 per cent rate, with little prospect of creating the many millions of vitally necessary, decent jobs. Unfortunately, this Budget does little to provide the necessary growth impetus.
 
The writer is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India.
Views are personal.