Budget must signal change

It needs to move beyond headline GDP to prioritise job creation and alleviating rural distress

With the election done and dusted, it’s time to get back to the business of running the country. The Budget for FY24-25 presents the government with an opportunity to show how it has absorbed the messages sent by the electorate. It cannot be business as usual; it must be a Budget for change. People have signalled that they want a greater focus on employment and alleviating rural distress. While headline gross domestic product (GDP) growth is undoubtedly important, it is not enough — the nature and quality of that growth matter as well. It’s also a message that free food and other handouts were important, especially in coping with the pandemic, but they also are not enough. People want a hand-up to better jobs and the dignity of employment, not just food and gas cylinders. Welfarism has its limits.

As the finance minister promised even before the elections in a speech to industry body FICCI in February this year, the government would focus after the elections on what economists call factor-market reforms — land, labour, capital and digital public infrastructure. She was right in emphasising these and we now hope she will act on them in the upcoming Budget. These reforms are needed to address why we use our most abundant factor of production — labour — so poorly, and why India’s manufacturing sector remains so capital-intensive. It must also address why our scarcest resource, land, is wasted in unproductive farms and sprawling urban agglomerates, rather than compact efficient towns and cities. India’s capital market also remains hugely underdeveloped because of the need to finance a massive consolidated fiscal deficit of 8-9 per cent of GDP, soaking up massive resources that should be available to the private sector. The statutory liquidity ratio should be done away with. Improving our digital public infrastructure further — where India is a pioneer — can only help even more.

While India desires to keep up its capital expenditure, it must also pursue fiscal consolidation more aggressively. The goods and services tax (GST) has finally stabilised and is generating more revenue. Disinvestment provides another potential source for the future. The existing system for disinvestment — where a target is announced, does not work. Even the government has recognised this. Based on my earlier study at the National Institute of Public Finance and Policy on India’s public sector units, except for the Maharatnas, I would suggest a massive privatisation programme over the next five years, but the way it is done matters hugely.

Handing over state assets to a few chosen corporations, akin to Russian oligarch-style privatisation, is not the right way. Transparent processes, competitive bidding, and ensuring that some of the funds are set aside for worker compensation are vital for strategic disinvestment to succeed. In democratic countries with reasonably developed capital markets, open market sales (share sales) could be designed to widen ownership and create a greater public stake for the disinvestment.  Employees could also be provided shares — employee stock option plans (Esops) —in companies when they come under private management, so that they are not as resistant to the sale and can share in the upside of post-privatisation.

The push for more capital expenditure — especially for infrastructure — has been positive for growth, but it has not yet led to the much-anticipated revival of private investment. The business lobbies clamour for more production-linked incentive scheme-type initiatives, in which they receive even more subsidies, but these are hardly a sustainable model for genuine private sector-led growth that creates more employment. Because the existing trickle-down economic model does not create enough employment, it does not lead to higher incomes among the masses, and therefore consumption demand remains tepid. Lending to the corporate sector has remained low and the recovery in investment has not materialised. The banking sector is itching to lend but as corporate borrowing has not picked up, it has increased retail lending hugely and very rapidly. This has prompted the Reserve Bank of India to issue a warning, cautioning banks against “exuberance” and targeting top-ups to mortgage loans.

While better infrastructure has improved India’s logistics, the costs of using it remain very high. Instead of expanding the PLI scheme as big business lobbies are demanding, lowering the costs of doing business will bring wider benefits. Lowering rail freight costs by covering more of the cross-subsidy to passengers in the Budget, lowering electricity prices to producers by absorbing more of the discoms losses, and bringing petrol and diesel into the GST — even at the highest rate of 28 per cent— would be a better use of government funds.

People look at the success of China and Korea to draw lessons and argue that India needs aggressive industrial policy to drive growth. Yes, that is correct, but they also did many fundamental things that laid the foundation for their miraculous development. Universal education and primary health care were a key element. Both freed up land with major agricultural reforms and, in Korea’s case, even land reform. Both urbanised very rapidly but used the urban designated land optimally. India can also pursue an industrial policy, but its objective must be to boost exports and employment. It must also focus more on education and health.

Finally, a big low-hanging fruit is tourism where India is underperforming significantly. With its heritage, religious, beach, mountaineering and desert tourism, India has it all but needs a master plan for the next five years, which should focus on women’s safety, cleanliness, and turning “Incredible India” into a “Credible, Safe India” to attract tourists. This will help boost employment too.

Some of India’s boldest reforms have come during a coalition government. It is time for such reforms to set India on a path to a more inclusive sustainable development path. Merely feeling satisfied with headline GDP numbers without more employment will not lead us to Viksit Bharat. The time to change course has come, and the upcoming Budget provides the opportunity to clearly signal this change.

The writer is a distinguished visiting scholar at the Institute for International Economic Policy, George Washington University, and co-author of Unshackling India, HarperCollins in 2021, which was declared the Best New Book in Economics by Financial Times for 2022