A roadmap for the upcoming budget

By Prof. Satya Narayan Misra*

The last year’s budget was characterized by fiscal stimulus, providing for nearly 10% of India’s GDP, to provide food security for the poor, revive the SME sector though collateral free loans and create additional employment opportunity through the MGNREGA program for the rural unskilled laborers and migrant workers. By common consent it was a responsible budget which combined empathy with economic pragmatism. It is also true that the bottom 50% of the population have been the most affected. The upcoming budget carries in its womb the weight of expectation of boosting investment and consumption, bolstering economic condition of bottom 50% and stemming the tide of inflation.

The major concerns that confront India are high level of unemployment (around 8%), a significant dip in consumption (6.9%), a very high level of fiscal deficit (6.8%) combined with widening income inequality. As is well-known, the manufacturing sector is the prime mover for generating employment. It has been stagnant since the 1950s, with the contribution to GDP being stagnant at around 26%. India’s growth story has been inked by the service sector. The average growth of around 8% which was noticed during 2004 to 2011 was characterized by very low increase in employment of about 1%. The real wage of workers has been stagnant for quite some time. The recently released World Inequality Report (2021) also brings out how the top 10% of India today enjoy 58% of the national income while the bottom 50% account for only 12% of India’s total income.

The other disturbing aspect has been high level of stunting amongst children (37%) due to persistent malnutrition and poor sanitation. Also anemia amongst adolescent girls has been very high in the range of 50% as per the latest NFHS report. Coupled with such serious nutritional deficiency amongst children and adolescent girls, the learning outcomes in government schools has been most dismal. As per the ASER finding, only 40% children are able to read properly and the quantitative capability is limited to only 28% students. Because of such recurring poor learning outcomes in the govt. schools, private school enrolment has gone up from 16% when the RTE Act 2009 was passed, to about to 32% now. This clearly shows that mega programs like SSA and POSHAN in 2018 are not able to improve learning outcomes, reduce stunting amongst children and anemia amongst adolescent girls.

The other serious issue has been the high level of borrowing and its adverse impact on growth and inflation. Prof. Kenneth Rogoff had brought out in 2011 that any country which incurs a debt of more than 90% of the GDP is likely to witness low or negative growth. This was proved to be prescient when Greece suffered from a major economic crisis as its borrowing had zoomed to 160% of GDP during 2011. Noting such concerns, the Parliament had passed the FRBM Act 2004 which aimed to reduce fiscal deficit to 3% by 2008. This target has been slipping year after year and stood at 9.5% during 2020-21 due to the fiscal stimulus provided by the Finance Minister. To be fair to her, almost every country witnessed high fiscal deficit due to stimulus provided to tide over the economic despondency during 2020- 2021 due to Covid-19’s infernal second wave.

Apart from the high borrowing levels, India is witness to a low level of tax collection as percentage of GDP. It has remained stagnant around 13% as against 16% for most EMDEs. In developed countries, it’s more than 20%. India is characterized by a large unorganized sector (93%), where tax evasion is rampant. Around 50% of Indians who are engaged in agriculture do not pay any tax. Besides, the corporate sector has a dubious record of evading tax and parking money in tax haven. Mr Arun Jaitley in his budget after demonetization had brought out how a large number of Indians who indulge in expensive consumption habits like foreign travel and luxurious cars evade taxes. Therefore, one of the thrust areas of FM is not only to bring down borrowing but how to improve tax collection as a ratio to GDP. In the World Inequality Report (2021), Thomas Piketty and Nobel laureate Abhijit Banerjee make a strong case for increasing corporate tax on the superrich and imposing wealth tax. Piketty also observes that “it is high time that India should come out of politics of caste and religion and concentrate on income redistribution”.

Prof. Richard Musgrave believes that a good budget rests on 3 pillars viz. proper allocation towards social and economic sectors, distributive justice by having steep progressive tax for the superrich and economic stabilization which ensures keeping inflation, unemployment and exchange rate variation within 5%. Ruchir Sharma, the highly rated global investment analyst, believes that India today is having unsustainable borrowing at 170% of GDP if we include private sector borrowing. He is also concerned about declining demography from 2% to 1.5%, which is likely to affect growth in the long run. He believes that India is also suffering from declining productivity, as it is not investing enough to avail of the fruits of industry 4.0.

The road ahead for the Finance Minister should be invest more in social sectors like quality foundation learning, improve India’s rickety health care infrastructure, and give a significant push to skilling. There is also a very strong case for privatization of the public sector banks, railways and Coal India. This would be a logical culmination of the LPG model which India adopted in July 1991. It is also time that FM should make all-out effort to improve tax/GDP by cutting down tax evasion and increasing the tax rate on the superrich and bringing back wealth tax. The emphasis of govt. would be to create enabling environment for manufacturing and the services. Fiscal stimulus of last year must give way to fiscal consolidation in this year’s budget. The time for shared prosperity has come and the FM ring the right bells to ensure that growth, employment and distributive justice walk hand in hand.



*The author was Financial Advisor in the Ministry of Defence. He can be reached through e-mail at [email protected]


DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way represent the views of Sambad English.


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