Economics is often referred to as a dismal science since it involves optimal allocation of resources in presence of limited supply but infinite demand. Macro-economic policy-making has an additional time effect embedded into it. Catering to immediate needs might have long – term costs and this makes Economic policy making a tight-rope walk. Typically, in a democracy short-term-ism characterizes policy making, simply because that is a convenient populist route. And that inevitably jeopardizes the long- term health of the nation’s economy – pretty much like an over-usage of antibiotics lead to anti-biotic resistance in the long run.
Seldom do we see a government shun the path of populism and take a stern stance for putting the country’s economy on a path with strong fundamentals. The interim budget presented earlier this month provides a glimpse of the vision the government has for Bharat in the coming decade. Before I delve into the task of analysing / dissecting the budget let me provide a disclaimer. Budget speeches and associated documents are usually an arduous read with multiple announcements. In this article I will try to filter out the trappings and provide the reader with the crux of the broad theme and economic thought that are being reflected through this interim budget.
National Debt & Sovereign Rating – A matter of concern
Bharat’s total national debt as a percentage of annual GDP is around 83%. Compared to Russia (18%) and China (22%), Bharat’s debt scenario is nothing short of grave. Now what impact does it have? Firstly, a huge annual interest payment expenditure and secondly and more importantly an abysmally poor rating of the country’s sovereign bonds. The figure below shows the Standard & Poor’s Indian sovereign bond rating for the last 30 years.
Bharat’s sovereign bonds are just above the speculative grade i.e just a notch above the junk bonds. And that makes future borrowing extremely expensive for the government. And this results in a vicious cycle. Hence for long term stability and growth there is a desperate need to address this issue.
Sitharaman’s Fiscal Prudence
The finance minister has taken a strong stance is arresting the debt issue by controlling the fiscal deficit. The target for the next financial year is to bring it down to 5.3-5.4% and eventually to 4.5% in 2025-26 as opposed to the current 5.9 – 6%. This has already set the ball rolling in the bond market with a few percentage points drops in interest rate on borrowings. But controlling fiscal deficit implies expenditure reduction. Now the question which the opposition is raising is where will the reduction happen? Will it lead to serious crisis in the lower-income sections? Answering these questions would automatically take us to the allocation part of the budget.
Increased CAPEX
The capital expenditure (CAPEX) outlay is going to be 11.11 lakh Cr which is a staggering 3.4 % of GDP. CAPEX is critical to businesses especially the small and medium sized ones. This increased expenditure will go a long way in alleviating the scars of the pandemic. More over infra project spending will also generate employment in the medium term directly and thereby increasing demand by putting cash in the hands of the labourers in the rural and suburban zones. The current government continues on its path to boost infrastructure which included major steps like setting up a professionally managed DFI with a capital injection of 20000 Cr set up in 2021-22.
The Low – Demand Argument – Doles versus Asset Creation
A major feature of the vision seems to be a cut in government expenditure. Right before the elections the FM could have made announcements about freebies. But as has been the feature of Sitharaman’s strategy she held back from that. The usual criticism against this is that it leads to a dip in demand which in turn slows down the supply incentives. This inevitably leads to doles and freebies which are politically convenient in the short run but adds on to the debt and thereby exacerbates the fiscal condition of the economy.
The FM on the contrary subscribes to the alternative school of thought where infra – spending will lead to employment in the lower – income groups and since lower the income, higher the propensity to consume as a proportion of income, this will lead to a demand boost. Yes, this may have a slightly gestation period as opposed to direct transfers. But this leads to solid asset creation which sets the economy up for further growth. More over this addresses the employment crisis which partly is a global slowdown spillover.
Inflation – Targeting
With Bharat’s inflation rising back to pre-covid levels it is a matter of concern and demands remedial measures. There are primarily two channels through which this can be addressed.
- The monetary policy channel: One way to tackle inflation is to raise the repo rates (which in turn raises commercial lending rates) and leads to decreased wages and increased unemployment and thereby lowering prices. But with the global slowdown this will lead to a serious employment crisis.
- Supply side boost leading to competitive pressure which in turn would lower prices. The current strategy seems to be in line with this. Big capex outlay, large scale production and downward pressure on prices.
