What should the budget be guided by?
The singular agenda for the budget should be to boost human capital for higher consumption and create avenues for their meaningful accommodation in the life of an economy
It’s that time of the year when all eyes are on the finance ministry. It is expected that the Union Budget 2020-21 will be watched more intently than previous ones. The economy is not doing well. The GDP is expected to fall below 5% this year, the lowest in a decade. The International Monetary Fund has already cut India’s growth estimate for 2019-20 to 4.8%, a sharp downward revision from the 6.1% it projected in October last year.
At the same time, inequality is rising sharply. According to a latest Oxfam report, the total wealth of India’s top 63 billionaires is more than the annual budget. Its richest 1% has more than four times the wealth held by the bottom 70%. Industrial performance is equally worrying, with some estimates calling it the worst since 1991, while the unemployment rate stands at a 45-year high.
However, the government is presented with an opportunity to address some of the fundamental issues that can retrack the economy.
First, move away from the temptation of making the budget an annual political document. It is essentially an economic document and should remain so. The government has the numbers in the Parliament and there is enough tenure left for course correction. This opportunity can be used to link the Budget with at least two other key policy documents. These include National Infrastructure Pipeline Report (NIP) released by the finance ministry and Strategy for New India@75 released by NITI Aayog.
It would appear that both these documents are not aligned with each other or with the vision of a $5 trillion economy. In fact, none of them seem to be aligned with the state of the economy today. While the NIP is silent on how Rs 100 lakh crore would be raised to meet the envisaged objectives, the NITI strategy does not offer much on operational insights. It speaks of India becoming a $4 trillion economy by 2022, but it remains anyone’s guess how this will be achieved.
In 2014, India was a $1.7 trillion economy; in 2019, it became a $2.7 trillion economy, having added one trillion US dollars in the last five years. In the next two years, it aims to add more than it achieved in the last five years, and in next five years, it aims to double what it achieved since 2014. All this at a time when economists predict that the worst is yet to come.
The upcoming Budget is a rare occasion to spell out the medium-term pathway for India. It must, therefore, resist from announcing populist schemes that can be a drag on the exchequer. It must factor in that measures like corporate tax cuts or real estate funds can help only when the demand side is robust.
Second, remember 60% of the Indian economy is consumption-driven. So the singular theme should be how to boost consumption in a manner which sustains. The operative word here is “sustain”. This means that more people should be at work with “spendable” wages as opposed to “survivalist” wages. Better wages also mean less subsidy, and hence a healthy state. Better wages serve businesses the most through consumption but it takes evidence and convincing to get them to pay more. Large businesses can lead the way by establishing norms on better wages not just on their factory floor but also in their supply chain.
Third, to get to a higher wage scenario, get the supply side right. This will entail deeper understanding of the proportion of input costs for enterprises in different labour intensive sectors and focus on removing supply side distortions like raw material and power costs that may have a significant share in rendering products uncompetitive and unaffordable for low income market like India. There is also a need to link factors of production with each other. While the cost of capital is administered through interest rates, other factors are not.
Fourth, tweaking of interest rates to boost purchasing power may work only for some. India’s fortunes are intertwined with consumption of many and not just a few. So, think of creating more medium and small enterprises to get more people into the workforce, while ensuring that business should compete, not exploit the weak. Large businesses need to co-evolve terms of trade with smaller discrete partners rather than dictate terms of trade.
Fifth, but not the least, increase the allocation on health and education. In other words, focus on creating a human capital capable of earning higher wages once they get into work life. The singular agenda for the budget should be to boost human capital for higher consumption and create avenues for their meaningful accommodation in the life of an economy.
Divya Maderna is Member of Legislative Assembly, Osian, Rajasthan, and Abhishek Kumar is director, CUTS International
The views expressed are personal