The Narendra Modi government is betting on the recovery of a pandemic-hit economy, which was already in a downward spiral since 2018-19.
It’s doing this through a mix of heavy market borrowings and raising resources via wholesale privatisation of PSUs and sale of public assets such as roads, airports, surplus public land etc. to fund infrastructure in the hope that new investments would bring growth and employment back on track.
The stock markets have welcomed the gamble on heavy borrowings plus sale of public assets, but execution will remain a big challenge as the government has so far not been able to attract buyers globally for many of its profitable PSUs at prices it would like. PSU and government bank stock prices have fallen to new lows in the last six years, and the bureaucracy has been struggling to find buyers for these assets at prices they truly deserve. Many of these assets were listed for sale last year, but the government fell woefully short of target.
Politically, Prime Minister Narendra Modi has given the spin that selling good public assets, including divestment of LIC and a few banks, is part of the government’s Atmanirbharta vision. In reality, selling these assets cheap will be the opposite of Atmanirbharta. This will be the biggest challenge for the government in the year ahead because the entire recovery of the economy is premised on massive sale of public assets, besides much higher borrowing at 6.8% of GDP in FY22. The fiscal deficit in FY21 is pegged at 9.5%, the highest seen in the decades after the 1991 reforms. The Centre and states’ borrowing combine could be about 14% of GDP. The government is hoping the global credit rating agencies will show patience in the backdrop of the post-pandemic economic consensus that such fiscal push is necessary.
There is no tax relief for the salaried middle class, which will continue to pay 30% to 35% tax plus cess when the corporate sector pays 25%. Seen along with the big tax cut for the corporate sector in late 2019, this Budget is the most business friendly one in decades. The corporate sector balance sheets have greatly benefited after the pandemic through a combination of lower taxes and cheaper money which has reduced their interest costs considerably. Many of them are already showing higher profits. But better balance sheets are not accompanied by more hiring and better employment prospects. On the contrary, corporates are shedding jobs or not rehiring workers who have left during the lockdown. No wonder the stock markets, concerned largely with company balance sheets, received the budget with gusto.
However, the household balance sheets have been smashed badly since the pandemic and indeed they were weakening for years before that, with household savings rate declining by 5 percentage points of GDP over the last eight years. The key question economists are asking is how will aggregate demand improve in the next two years if households don’t spend. They have to first recover their lost savings and only then will they begin to spend.
The government is hoping its big spend on infrastructure – physical and social – will create new incomes and lead to more spending. The benefits of the big increase (34%) in capital expenditure will probably kick in over 4-5 years if execution is efficient. The political economy related tensions between the Centre and states must also ease for these projects to take off. The growing trust deficit today between the Centre and states make smooth execution of projects difficult.
Overall, structural decline caused in India’s economy since demonetisation and the multi-decade high unemployment ratio cannot be reversed so quickly. CMIE data shows India is experiencing a substantial increase in employable workers opting out of the labour force. Labour participation ratio – which is the percentage of people looking for jobs in the total employable work force of about one billion – is now down to 44%, whereas this ratio ranges from 60% to 66% in other comparable developing economies in East Asia.
These are the structural problems which need to be overcome in the next few years. One is not sure how employment growth will pick up when the IMF says India may take about three years to return to the pre-COVID levels of output. Can this Budget ensure a faster return to a sustainable growth path, is a question which is difficult to answer at this stage.
There are too many variables at play, not least the daily dose of divisive politics this regime unleashes. After all, don’t forget many leading economists have spoken about how divisive social policy is not conducive to stable economic growth.