Chandrajit Banerjee | India needs ‘growth’ Budget as global risks get amplified

The forthcoming Union Budget, to be presented in Parliament by finance minister Nirmala Sitharaman on February 1, will be the first real post-Covid Budget and the last full-year Budget before the general election is announced. The macroeconomic backdrop is a challenging one, where domestic demand drivers are still recovering from the ravages of the pandemic while the global environment is one of great uncertainty. It goes without saying that the Indian economy will not remain immune to the global reverberations.

The Budgets over the past few years have been very high on reforms and providing capex support to the economy and industry. The forthcoming one should continue to take forward the government’s focus on creating an enabling policy and infrastructure ecosystem for manufacturing in India, apart from bracing the economy for an imminent global slowdown with minimal sacrifice. Towards this end, here are five specific suggestions for the upcoming Budget.

First, an appropriate fiscal strategy needs to be spelt out. Fiscal consolidation is imperative for macro-economic stability. As per the latest government numbers, the economy remains on track to achieve the fiscal target of 6.4 per cent of GDP on the back of healthy tax buoyancy despite a sharp increase noted in the spending this year. The Budget should lay down the fiscal consolidation roadmap so that the fiscal deficit can move towards 4.5 per cent of GDP by FY26.
It is pertinent to mention here that so far, the revenue augmentation has been driven mainly by tax component, while the non-tax component has continued to remain lackadaisical. The latter needs to get a rev up, to diversify the sources of revenue.

To achieve this, it is suggested that there should be aggressive focus on privatisation. It is suggested that the responsibility and authority for the identified PSUs could be transferred to DIPAM from the line ministries once a decision has been taken to privatise them. In addition, the Budget should target higher asset monetisation receipts in FY24 with a focus on the railways and telecom.
The subsidy bill in the current year has ballooned due to a sharp rise in the food and fertiliser subsidy. This needs to be rationalised next year, as a high subsidy burden squeezes the finances available for funding the productive expenditure in the economy. Non-merit subsidies comprise a staggering 5.7 per cent of GDP, with a breakup of 1.6 per cent and 4.1 per cent between the Centre and states.

This is clearly unsustainable.

Second, the Budget needs to take forward the ambition of developing a globally competitive manufacturing sector. With shifting global value chains, this is an opportune time for India to expand its manufacturing base to capitalise on the China plus one strategy being pursued by many global economies. A globally competitive manufacturing sector will play a pivotal role in India’s journey to becoming a “Viksit Rashtra” (developed country) in the next 25 years or so. This will be accompanied by a rise in the share of manufacturing sector in GVA from the current print of 16 per cent to around 25 per cent over the similar time period.

A critical impetus to accomplish this will come from the manufacturing sector embracing technology and innovation in a much bigger way and gearing up for the Techade. This would entail ramping up investments in R&D, from the current levels of a mere 0.7 per cent of GDP to four per cent of GDP by 2047 with an interim goal of 2.5 per cent by 2030. To facilitate this, it is suggested that the Budget should set up a joint Industry-Government Science and Technology Advisory Council to deliberate on making a roadmap for achieving these aspirational goals.

Third, the Budget needs to provide continued capex support to the economy. There is no greater multiplier than capital expenditure for the economy. It is well known that every rupee spent on infrastructure generates a multiplier effect of approximately 2.95 for the economy. In the coming year, with global uncertainty becoming a restraining factor, revival in private capex is expected to remain subdued, thus reinforcing the need for public capex to pump prime the economy.

In this context, it is suggested that the Budget should increase allocation towards capital expenditure by 35 per cent, like last year, thus taking the total public capex to about Rs.10 lakh crores. This should include significant focus on rural infrastructure to boost jobs and incomes in the rural areas. This would boost rural demand.

The Budget should also continue with the Rs. 1 lakh crore of interest-free loans scheme for state capex and make it performance driven to encourage the states to undertake capital expenditure. State capex is a large proportion of overall government capex, and hence it is important to continue to extend support to states for capex.

Fourth, the Budget needs to spur health and education spending. The need to substantially increase spending on public healthcare and education is well recognised. In fact, investing in health and education is pivotal for achieving sustainable and inclusive growth, while improving worker productivity in the post-Covid-19 period. The government has made significant allocation in the last two Budgets to address the healthcare system, but it needs to be stepped up even further. The consecutive Budgets should endeavour to raise public spending on healthcare from 1.28 per cent of GDP in 2018-19 to around 2.5-3.0 per cent of GDP by 2025 to ensure affordable healthcare. In addition, the Budget could announce a high-powered task force to examine the possibilities of private institutional capital supporting public capital in a large way for healthcare and education.

Finally, it is critical for the Budget to lend its support for sustainable growth. India is one of the very few countries globally to have walked the talk on its climate commitments and has set an ambitious goal of achieving Net Zero by 2070. To achieve these ambitious goals, the government should set up a mechanism for green certification to help MSMEs access overseas Green Finance. The mechanism should be accompanied by G2G engagement for creating acceptance for the mechanism.

The Budget could also announce a specialised Development Finance Institution (DFI) to fund the energy transition and other climate change mitigation and adaptation measures along with announcing a PLI for electrolysers to encourage production of green hydrogen.

Industry is looking forward to a growth-oriented and reform-focused Union Budget that would not only address the existing macro-economic challenges but also put in place strong levers for the development of the country during the “Amrit Kaal” with an overall objective of making India a “Viksit Rashtra” by 2047.