Is finance minister Arun Jaitley really set to unveil a Budget that’s being described as Liberalisation 2.0? While the consensus among economists in India and abroad is that demonetisation may have quashed any chance of a Budget that can fit that bill 25 years after former PM P.V. Narasimha Rao quietly ushered in Liberalisation 1.0, it’s only fair to say, all bets are off when anticipating what Prime Minister Narendra Modi may pull out of the proverbial hat next. The doors to domestic corporate investments may be closed, but a window to FDI is open, especially in multi-brand retail, with the potential to create the most important effect — jobs. Will Modi-Jaitley take the big step?
India is not out of the shadow of Demonetisation — DeMo, for short — yet, but the Modi government is already set to embark upon the next experiment — this time, the all-important Budget exercise, set to be presented on February 1.
While the government seems adamant on presenting the Budget just three days before a round of crucial assembly elections begin, experts believe it may be wiser on its part to put it off to until after the elections, perhaps choosing instead to present a Vote on Account for now.
Doing so would allow Prime Minister Modi to gauge the real level of popular support he has for DeMo, partly via the election results. By then, the government will also have a better idea of how long it will take to replenish the cash it sucked out of the economy, and perhaps even of how long a recovery of sorts might take.
By the end of March, it will also know the full extent of the banking crisis, due to bad loans, it has on its hands. The DeMo exercise has been done and the government already has, in any case, its hands on the money —our money — in the banks, which it can use to save the banks, it would now be prudent to wait to know exactly how bad the problem is before making provisions for it. As even the Election Commission has said with a level of exasperation, "heavens won’t fall" if the government presented a Vote on Account on February 1 and left the Budget for until after elections.
A budget made now will be full of assumptions — about what exactly the DeMo exercise has turned up, about GDP growth prospects, about banks’ bad loan numbers, about the time needed to put cash back into the system, about the extent of damage DeMo has done to the economy — especially to the informal economy, which is the bigger, more reliable driver of economic activity and jobs, and which has been badly hit by the cash ban.
What’s more, the government is making significant changes to the Budget itself, both symbolic and substantial: its presentation has been advanced to February 1 (and the fiscal year will henceforth be reckoned from January to December, rather than April-March); there will be no separate Railway Budget as was the case hitherto, and there will be no Plan and non-Plan expenditure distinctions. Also, the GST is to be rolled out later in the year, the crucial details of which have not yet been hammered out.
Having rushed into one large exercise without thinking and preparation (and claiming that to be a virtue) and having put an entire nation to unnecessary hardship and uncertainty, it would be prudent for the government to not do the same with the Budget.
But if Modi-Jaitley must present it on February 1 regardless, then one must pray that they will at least do so acknowledging that the currency supply is not going to improve until at least the second half of the fiscal, neither will the digital economy pick up sufficient scale to fill in the gap.
These are fundamental, because returning cash supply to pre-November 8 levels is key to reviving economic activity in the sectors that have been hurt by DeMo.
The government will also do well to realise that in 2017, and perhaps even next year, private investments by big companies are unlikely to pick up, even if cheaper credit is now available thanks to the cash that has been deposited in the banks. Most large companies and conglomerates are still too deep in debt, but have been let off the Raghuram Rajan hook.
At the same time, small industries, which were doing pretty well on credit offtake until recently, have been badly hit by DeMo and are going to take some time to recover. Meanwhile, the start-up sector, except for fintech companies, has seen funding dry up. Bottomline: the formal economy is unlikely to perk up this year.
The one trick that the government can resort to is, of course, loosening the fiscal strings to compensate for the monetary contraction, and pump money into infrastructure — this seems to be the recommendation of the Niti Aayog, calling for China-style coastal economic zones — but availability of funds is not the only reason why many projects have stalled. Also, the Chinese export model of growth is not available to India; and after DeMo, neither is the domestic market, at least for the coming year.
Perhaps, therefore, this year’s Budget will do well to focus on the farm and rural sector, pumping credit to the informal sector in general. A Budget for the vegetable vendor, the kirana trader and the like, rather than one for Adani and Ambani. For the latter, a little loan recovery scheme, just like the black money amnesty scheme, wouldn’t be out of place, though.
The big push for investments and jobs will have to come from FDI. It may be the right time to bring in multi-brand retail to draw in big bucks, create jobs, and help realty and construction recover. A conspiracy theorist would, in fact, read this as one of the motives behind the government’s push to destroy the informal sector!
The time for needless, heedless, politically or ideologically motivated tinkering or, equally worse, making changes merely to show one’s strong leadership credentials is over. Whatever Modi might say, the economy he inherited from the UPA government was nowhere near as bad as the one P.V. Narasimha Rao inherited 25 years ago. Rao did not whine about it on television. He simply tore down the entire economic system and rebuilt it. Today, we call him Half-Lion. No such demand is being made of Modi, and he should craft an economic policy with a cool head, drawing on the knowledge of expert economists. After all, he would not want to be looking back at his own legacy and be called anything but a full man !
(The author is a Bengaluru-based economist and commentator)