Making Budget work

Context: The Budget’s success will depend on policy execution and fiscal-monetary coordination.

Challenges to the Indian Economy:

• Falling India’s investment/GDP ratio – 5% over the last decade.
• Poor private sector manufacturing utilization rates (sub-70% before COVID and 63% during pandemic)
• Issues with Public-Private Partnerships (PPPs): facing upstream implementation and regulatory risk.

Budget 2021: Three paradigm shifts from the past

1. Increased public investment: Capex grew to 2.5% from 1.6% of GDP pre-COVID. Associated benefits:

• • Multiplicative effects: reinvigorate growth, create jobs and likely to crowd-in private investment.
  • Reduce household precautionary savings.
  • Disinvestment and privatization: of non-core public-sector assets (that don’t generate positive externalities) being replaced with physical and social infrastructure (having positive externalities).

• • In contrast to the PPP model: Infrastructure will now be financed off public sector balance sheets and, once viable, will be monetized to recycle proceeds into the next project.

• • Brought the Food Corporation of India (FCI) liabilities back on the budget.
  • Conservative tax revenues: Revised estimates peg this year’s gross taxes at 9.9% of GDP.
  • Associated benefits:
    • Higher-than-unitary-elasticity to growth in taxes: due to expected double-digit growth in nominal GDP and increased formalization due to COVID.
    • Creates some buffer if crude prices keep rising or other revenues don’t materialize.
    • Credible accounting: will bring down risk premia in bond yields; generates stimulative impulse.

Way forward:

• Simultaneously building and selling assets:
  • Front-load disinvestment and strategic sales to take advantage of buoyant equity markets before global central banks become more cautious.
  • Equally important is to identify shovel-ready projects to deliver the promised public investment.
• Ensure nimble policy support: while fiscal policy is being appropriately counter-cyclical at the moment when the recovery gets stable, policy support should be withdrawn with equal speed.
• Complimentary monetary policy: The RBI should first, ensure new equilibrium in raised bond yields (due to increased public investment) and then, progressively normalize liquidity.