Budgetary provisions matter more than the speech

Finance Ministers have an uncanny way of figuring out what makes the fish bite and neutralizes the sceptics. Nicely rounded words in the budget speech – like phonetic “quick wins” – come in handy to send the roosters crowing a new Dawn.

A three pronged paradigm shift in the budget?

FM Sitharaman’s salad dressing for FY2021-22 was to present the possibility of, what economist Sajjid Z. Chinoy, a member of the Prime Minister’s Economic Advisory Council, was moved to describe, somewhat floridly, as a paradigm shift in public policy (Indian Express February 7). The three prongs of change being first, asset swaps to finance infrastructure, second, a new PPP model with the public sector building infrastructure and then “monetizing” assets to finance a virtuous cycle and finally transparency in the budget data.

To be fair to the FM, she either never heard the music in her own budget or was honest enough to know that the music was ephemeral. She structured her budget around six pillars of Health, Physical and financial capital, Inclusive development, Human capital, innovation and Minimum Government and Maximum Governance.

That India under funds infrastructure is well known. We also seriously under fund education and health. The BJP is committed to infra-spend as demonstrated earlier by the NDA and thereafter again under the present government. Health and well-being are new and welcome priorities for the party. Defence spend is a traditional priority, which was shortchanged in the FY 2021-2 budget with a paltry 7% increase over the current year BE.

Very little room for smart moves

Sadly, the degrees of freedom to reallocate spend, available to any Indian Finance Minister, are limited. India is a big unwieldy bus with a very wide turning circle, so changing course suddenly, is difficult. The toughest is to divert spend away from “political pork” – referred to as “political economy constraints” in polite circles and instead to fund merit goods, stuff which generates “positive externalities” and “inclusion” – jargon, for promoting environmentally better and continuous growth whilst sharing the growing pie better.

An existential problem is stagnant government revenues, especially for the Union government. Its revenue to GDP ratio (after transfers to state governments) was 7.9% in 2008-09 which slid to 6.9% in 2015-16 with some recovery in 2016-17 at 7.2%. In comparison states became cash rich with a revenue (including Union transfers) to GDP ratio which consistently increased from 8.4% in 2008-09 to 10.4% in 2016-17 (MOF, Public Finance Statistics).

This inter-government transfer of resources to the states is a manifestation of “good intentions” around cooperative federalism and should be recognized as an achievement rather than a problem.

Statis and its aftermath

Sadly, reduced revenues for the Union were not accompanied by an internal review of Union government allocations to move funding away from non-core areas, where the states are prime movers and towards its core mandate – defence, diplomacy, security, Rule of Law, national infrastructure, energy, foreign trade – particularly exports, integration of markets-particularly financial markets and determining national standards where network effects are dominant.

Also missing has been the necessary transition from direct supervision of state governments programs to light handed regulation. Federalism implies privileging contextual solutions to local issues and is inconsistent with pervasive one-size-fits-all national programs.

FM on the button with the “nudge”

The good news on this score, is that the FM was sensitive enough to specifically include in the budget speech that states would be “nudged” – not directed, but incentivized – to allocate more for capital expenditure – which is exactly the right way to go. A generic light-touch approach to national development is to be welcomed.

Too much of what the Union government does, pre-empts what states should be initiating. Not surprisingly there is not enough money for everything.

It is fair to assert that pillar six of the Budget – “Minimum Government and Maximum Governance” will remain in the books unless the Union government disintermediates its direct association from areas which are the core mandate of the states though one must recognize that with the burden of 75 years of history, this can only be hoped for over time.

Privatization yes! but when? and for whom?

The use of the “P” word – “Privatization” instead of disinvestment as was the norm, has enthused stock markets and analysts. But triangulation with the underlying budget provisions raises questions about the timeline.

The head “disinvestment receipts” budgets for just Rs 1.75 trillion, even lower than the Rs 2.1 trillion budgeted this year. Listing LIC and disinvesting a small share (3%) of its stock can fetch as much. Why this lack of ambition, if the intent is to finance capital spend (Rs 7.7 trillion per year) from the sale of existing public assets rather than the general revenues? Could it be that the “P” word of “Politics” overrides the commitment to privatization, as history suggests?

The stated intent to raise revenues by monetizing operational public sector assets is similarly unsupported by a significant increase under the head “receipt of dividends from PSE and other investments” which are budgeted at just Rs 0.5 trillion- again displaying a lack of ambition. Budgeted receipts of “non tax revenues” at Rs 2.4 trillion are 38% lower than the BE this year. Also, enhanced allocations for IR, Highway construction and Power sans matching receipts indicate that “monetization” will happen at some future date.

The transparency and care with which the budget has been prepared gives the lie to this being an oversight. Far more likely, the “paradigm shift” is slated to happen only once the state elections are over and conditional on the BJP doing well. Such caution is not unusual for democratic governments, which sway with the breeze blowing from the public.

The time for hitting the “sweet spot” of large-scale privatization, is once growth revives, not when it is shackled on four counts. First, the uncertainty around the pandemic, the associated job-loss and high levels of household insecurity. Second, the deepening financial crisis in public sector banks. Third, the enduring lack of demand in the economy. Fourth, the dilatory timeline of a trickle-down strategy for reviving incomes via public investment in infrastructure.

A “P” word which denotes “Prudence” suggests that continued contra-cyclical (direct) measures to support aspirational employment and poor incomes – which the budget does insufficiently- take precedence over “jump-starting” a scarred but healing economy by adopting the infra-investment route.

The record of publicly financed infrastructure development (power distribution assets for example) does not suggest an easy switchover to monetizing operational assets, quite apart from the moral hazard of bringing “lemons” to market.

Also available at TOI blogs February 18, 2021 https://timesofindia.indiatimes.com/blogs/opinion-india/budgetary-allocations-matter-more-than-the-speech/

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