Dreaming big doesn’t necessarily mean acting big. Indian Finance Minister Nirmala Sitharaman’s maiden Budget speech captures New Delhi’s $5 trillion aspiration by 2025 (that’s one year’s postponement) and delivers some of the minute needed to get there. If you’re looking for ‘big bang reforms’, don’t look for it in Budget 2019. Instead, read her budget as a series of small steps that bring efficiency into extant systems, a work-in-progress of the past five years that take the NDA government’s policy continuity forward, and powered by the BJP’s confidence of 303 seats in Lok Sabha.
The biggest problem India is facing today is a slowdown in economic growth to 6.8%, still the world’s fastest but not fast enough. There are two major causes for this slowdown. First, technical reasons such as liquidity and financing. Sitharaman attempts to fix this problem by proposing Rs 70,000 crore ($10.2 billion) of capital to public sector banks (PSBs), which in turn are expected to open their lending taps. This capitalisation will come with promises to strengthen the governance systems at PSBs. On the non-banking financial companies (NBFCs) side, she has proposed a one-time, six-month partial credit guarantee to PSBs “for the first loss of up to 10%,” apart from strengthening the regulatory authority of the Reserve Bank of India (RBI) over Non-Banking Financial Companies (NBFCs).
Looked at this in isolation, these seem to be good proposals. Will they work? The answer is not so straightforward. There is a loud and clear trust deficit in the economic system today. This deficit prevents entrepreneurs from taking on projects. Worse, it prevents bankers from giving loans for fear of spending time in jails if they go bad. For this, Sitharaman can do little — the economic system needs to change and understand that every business failure is not fraud, every bad loan not a scam. The government together, and not Sitharaman alone, needs to get over this “jail them” approach and start rethinking solutions, otherwise economic agents will eschew risk and place their monies in government bonds.
At the same time, it is clear that the government alone cannot finance economic activities — the Rs 100 trillion ($1.4 trillion) investments in infrastructure, for instance, cannot be made without private sector initiatives. Sitharaman understands this and is looking at public-private partnerships (PPPs) for metro-railway projects. These, she further says, will be powered by development finance institutions, for which a committee will be set up. This may not be such a good idea — the lending rates may be lower but could mean greater capital requirements from the government’s side. The numbers are far too large, the implications far too huge.
India’s infrastructure building has become a huge challenge. PPP projects have fallen steadily over the past six years — from 132 projects worth Rs 72,230 crore ($10.6 billion) in 2011-12, they fell to 66 projects worth Rs 2,460 crore ($359.6 million) in 2013-14 and crashed to seven projects worth Rs 420 crore ($61.4 million) in 2017-18. This is a problem that goes beyond finance or operations into ethics. The way of doing business has changed over the past five years. Laws relating to bankruptcy, benami transactions and the Goods and Services Tax have plugged loopholes of corruption. While the old way of doing business is narrowing and dying, the new way is yet to come up — in transition stands India. Fixing this will take time.
Powered by the force of seats in Parliament, Sitharaman has taken two of the most politically volatile calls in her Budget — the strategic disinvestment of the ailing and floundering Air India and the Rs 2 ($0.03) increase in the price of petrol and diesel. On the former, it is certain that trade unions will get into action with strikes, on streets, and by leaning on the predictable delays of the judicial system. This will be a noisy but sedate affair. The latter will push the inflation rate higher. At 2.9% it is well under control but since transport economics will be directly affected by this rise, the inflation rate will spill over. It will also unite the Opposition that so far has nothing to hold on to since Verdict 2019.
Certain that these two will revive cries of “Suit-Boot Ki Sarkar” – “a government of and for the rich” –, she has attempted to balance them by raising taxes on the superrich who earn more than Rs 2 crore ($292.4 thousand) and Rs 5 crore ($731 thousand) per annum, reminding us of the dark possibilities that former Prime Minister Indira Gandhi initiated in her 1970-71 Budget that increased the marginal rate of tax to 93.5% on incomes of more than Rs 200,000 ($2,9 thousand). How much additional revenue this will raise remains to be seen but the political fires ignited by inflation and strategic disinvestment will get doused somewhat. What this will do to money flows of the super-rich too is open to debate — be prepared for the rise of several and diverse unintended consequences.
Sitharaman’s Budget seeks to inject efficiencies into the regulatory system. Taking the regulatory authority on housing finance away from National Housing Bank — itself a refinancer and lender and hence conflicted — to Reserve Bank of India. Or, separating the National Pension System Trust from Pension Fund Regulatory and Development Authority that regulates NPS. In themselves, these are small steps. But when viewed through the prism of systemic efficiencies and conflicts of interest, they matter and could be the blueprint for regulatory frameworks going forward.
Overall, a Budget of small things that contributes to the government’s larger economic and non-economic narrative — Sitharaman’s task has only begun. The roadmap is clear, for execution we wait.
The original version of this article was published by the Observer Research Foundation on July 5, 2019 at this link.