Bet on reform-based growth despite India’s economic contraction

The game-changing 2021-22 budget is needed to reboot the economy and revive growth, along with greater transparency, especially with regard to additional budget resources. The three main requirements are: (i) high cost growth to pump-prime demand, (ii) change in the allocation of expenditure in favor of revenue support and government investment, combined with the immediate mitigation of their high demand coefficient effects, including immunization from lost livelihood pandemic, and (iii) medium And extensive structural reforms in the financial and banking sectors in particular to keep the economy afloat for long-term high growth (‘Proposed Economic Strategy for a Sustainable Economic Recovery’, see Mint, 18 December 2020). The February 1 budget was widely praised for its transparency, but how does it measure up to these needs?

The first requirement is a high cost increase. However, the budget surprisingly adopted a restrained attitude. In 2020-21, the central government increased spending 30.4 trillion (revised estimate), an increase of 28% over actual expenditure in 2019-20. This was achieved despite a 7.7% decline in revenue due to a huge increase in loans 18.4 trillion, an increase of 132% over the budget level 8 trillion. For this, however, the gross domestic product (GDP) contracted significantly more than the estimated 7.7%. Strong spending push must continue in 2021-22 to revive growth, especially as the budget achieves high revenue growth at 15% and a massive increase of over 300% in non-debt capital receipts.

But the budget is budgeted to increase by only 1% in nominal terms, indicating a real decline in inflation from 4% to 5%. The fiscal deficit is projected to decline from an exceptional GDP growth of 9.5% in 2020-21 to 6.8% in 2021-22, an absolute decline of 18%. Such a strong economic contraction feels unscientific at a time when it is most urgent to restore growth. The budget team (i) expects a large shortfall in budget receipts, particularly non-debt capital receipts, and (ii) correctly predicts that the root cause of the sharp contraction in 2020-21 will lead to higher growth in 2021. -22 Despite strong economic contraction.

The second requirement is a change in spending allocation in favor of capital expenditure, revenue support and social services. Allocating over 14% of total expenditure for capital expenditure is much higher than the extraordinary 10% allocated in 2020-21, but 13% higher than the actual share in 2019-20. However, allocations have been reduced 4.2 trillion in 2020-21 2.4 trillion in 2021-22 for food subsidies From 1.1 trillion 0.7 trillion for the Mahatma Gandhi National Rural Employment Guarantee Scheme. The PM-Kisan allocation is the same 0.65 trillion, which represents a reduction in actual terms. Allocations for education and related activities are only 5.6% higher than in the last general 2019-20, indicating a reduction in actual terms. Allocation for health at Much more than 70 trillion 29 trillion in 2019-20, but in reality all of this is due to the Kovid vaccination program ( 35,000 crores). The significant increase in other health-related costs, such as water supply and sanitation, was mainly due to the 15th Finance Commission’s Grant Awards. This parsimonious treatment of income support and social spending is a weak point of this budget.

The third requirement is on reforms, especially on a large scale in the financial sector. This calculated budget worked well, sustaining the defender by hurting tariff rates and raising them further. Several reforms have been announced, including ambitious programs such as privatization, property monetization and infrastructure investment. In view of space constraints, I limit my comments here to banking and finance versions. Creating an asset restructuring agency and an asset management company to take over and manage the stressful assets of public sector banks (PSBs) leaves them with clean balance sheets, allowing them to restart normal lending and restore credit flow. Economic activities. Another key reform was the decision to privatize two PSBs along with IDBI Bank. However, raising more new equity than government holdings would have been a more effective way to privatize and reinvest them at the same time (see ‘Reorganization of state-owned banks: privatization must do this,’ see Mint, 14 January 2021).

Allowing foreign direct investment of up to 74% in insurance companies and proposing shares of Life Insurance Corporation of India are also important moves towards the progressive privatization of the financial sector. Finally, the proposal to set up a new development finance company (DFI) identifies the gap in long-term investment financing. However, companies such as ICICI and IDBI started out as DFIs and many public sector DFIs are still operating, although they are also burdened with stressful assets. Therefore, this proposal needs to be considered more clearly.

In summary, reform proposals are important programs to reset the economy for higher growth. But as always, it depends on how these reforms are actually implemented.

Sudipto Mundil is a Distinguished Fellow of the National Council of Applied Economic Research. These are the personal views of the author.

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