Budget 2021: Lessons for the Finance Minister from past Budgets : 11-10-2020

When Nirmala Sitharaman presented her first budget in July 2019, which was also the first Budget of the Narendra Modi 2.0 government, she began with an optimistic outlook for a “New India” that was on its path to become a $5-trillion economy in a few years. In the events that have transpired since then, especially with the shock of COVID-19, the goal has taken a significant setback. As Sitharaman prepares to deliver her third budget this year in the backdrop of the pandemic, she shoulders the  unenvitable responsibility of extricating the economy out of its worst crisis and putting it back on course to the targets that the government had set for itself.

There have been recurrent themes in Sitharaman’s approach in her past budget documents and stimulus packages, which could provide crucial learnings for the upcoming budget. First, is the focus on infrastructure spending as a means to provide a fiscal stimulus to the economy. In 2019, the budget laid out a blueprint of large-scale infrastructure activities including improving the country’s transport infrastructure by constructing water grids, i-ways, highways, and regional airports. A similar approach was adopted in 2020 when a big infrastructure push was made through the National Infra Pipeline for a range of infrastructure projects.

The upcoming budget will most likely provide a similar boost in infrastructure spending to revive demand in the economy. But the government needs to do more to make its investments effective. The problems in infrastructure lie beyond investment alone. Data from the quarterly reports released by the Ministry of Statistics and Programme Implementation (MoSPI) show that over the last six years, central government infrastructure projects have run into significant time and cost overruns. The  leading causes for these issues have been regulatory clearances, land acquisition, and fund constraints.

There have been murmurs that the upcoming budget might unveil a large development financial institution (DFI) that could address issues of access to capital since such a body will have a larger risk appetite than banks. However, the functions of such a body should not end there. It should function as an arm of the government that can cater to all infrastructure-related issues and provide advisory services as well. It is crucial for the Indian economy to address the challenges that ail its infrastructure investments as successes on this front can significantly bolster its job creation efforts.

Second, the Modi government has always adopted a fiscally conservative approach and made a conscious effort to gradually work towards the targets set by the Fiscal Responsibility and Budget Management (FRBM) Act. In Sitharaman’s first budget presentation, she had committed to a fiscal deficit target of 3.3 percent for FY20. We had written at the time that the target was optimistic and would be missed. In the following budget, the data showed a fiscal deficit of 3.8 percent during FY20.  It was the advisable thing to do since the economy was slowing down. In the current financial year, as the growth figures are poised to dip into negative territory, the upcoming budget should cut the fiscal restraints as much as possible under the stipulations of the FRBM Act. Such an approach to provide the necessary stimulus to the economy that can help ameliorate the pandemic pains.

Finally, Sitharaman’s budgets and the stimulus packages that she has introduced during the pandemic have been disproportionately focussed on supply-side measures. The first two budgets had substantial tax incentives for the middle class and corporates while the stimulus packages had several credit incentives including collateral-free loans and repayment moratoriums. While such measures are useful to drive economic activity, they need to be complemented with demand-side initiatives. The supply side measures such as loans at a discounted rate will only help the economy grow if there is adequate demand.

In the upcoming budget, the government needs to move beyond supply-side interventions and develop innovative ways of boosting demand in the economy. The role of the government on this front has become essential given the soaring unemployment levels in the country. A possible solution in the short run can be tied with the pandemic itself. India can take a leaf out of the US stimulus package announced last month. One of the deals in the package comes in the form of the Supplemental Nutrition Assistance Program (SNAP), which is the federal programme that provides food purchasing assistance to low-income people. Food stamps are not just a way to tackle hunger among the poor and jobless but provide the best boost to the economy when compared to other kinds of stimulus spending. As per Moody’s estimates, every dollar spent on SNAP has increased economic activity by $1.73. On the other hand, every dollar of tax cut has yielded a benefit of $1.29. It has been found that beneficiaries spend their food stamps quickly, which boosts demand in local businesses. Such policies also benefit the most distressed sections of the population more directly than other stimulus interventions like tax cuts.

As Sitharaman rises to present her most challenging budget document yet, the country will hope that she draws learnings from her past experiences and delivers a comprehensive financial plan.

Source : PTI