Myth & reality of this Budget

The 2019-20 Budget presented to Parliament today is full of promises, or of objectives, but little said in the Budget or Finance Minister‘s Speech on economic priorities, the strategy for achieving the objectives and the measures for mobilisation of resources. 

This year the Budget Session will not see the Annual Economic Survey placed on the Table of Parliament, for no disclosed reason. Hence a complete statistical analysis based on government-collected data is not possible as of now of the Budget proposal.

But according to available statistical indices, the Indian economy is on the edge of falling into a serious crisis. Government now admits that revised data shows a sharp fall in GDP growth rate from 8.2 per cent in 2016-17 to 7.1 per cent in 2017-18. We do not have data for 2018-19 to discern if the decline in GDP growth will continue, neither any plan as to how growth rate will be higher in 2019-20 due to Budget proposals. 

Another indicator of a crisis is the admission in the Budget that the loans to be taken by the government in this Budget will almost be equal to the amount to be repaid as past loans taken. In other words we are on the verge of a debt crisis, which is dangerous. Nor is there any concrete proposal in the Budget for liquidating the NPAs burden on public sector banks.

What then needs to be done today to obviate the looming crisis? First let us understand the economic compulsions, and the reality of today’s economic situation assessed from the following facts: 

[i] Indian economy needs to grow at and average of 10+percent per year for the next 10 years to achieve full and adequate employment, to decimate poverty, and for India’s GDP to overtake China’s GDP.  

The growth rate of the Indian economy as measured by GDP has fluctuated around 7 per cent per year over the last five financial years 2014-15 to 2018-19. 

This growth rate is insufficient to reduce unemployment, leave alone create full employment and drastically cut poverty in the country. 

[ii] To raise GDP growth rate to more than 10+ per cent rate, the rate of investment has to rise to 38 per cent of GDP from the present 29 per cent. Of this, household saving is the bulk of India’s national investment at 80 per cent of total investment. 

But 2016 household saving has dropped from a high of 34 per cent of GDP in 2014 to 28 per cent of GDP in 2018, mainly due to the poorly implemented demonetization. 

Household saving has to be incentivised [such as by abolition of personal income tax] to rise back to 33 per cent of GDP. We are witnessing today how much happiness there is due to a small waiver of income tax by proposing to raise the tax limit bar to above Rs 5 lakhs. 

Non-household saving today is about 5 per cent of GDP. For fixed deposits in banks, the rate of interest should not be less than 9 per cent and this will boost institutional saving in fixed deposits.

Since the growth rate in GDP is calculated as equal to the rate of total investment [as a ratio of GDP] divided by the productivity coefficient of capital [called capital-output ratio presently at an inefficient high of 4.0], therefore to achieve 10+ per cent growth rate in GDP, a household saving rate of 34 per cent of GDP, a non-household saving rate of 5 per cent of GDP, and a capital output ratio at not more than 3.9 is necessary. 

The decline in the level of household saving thus causes a decline in the GDP growth rate and it is this that was needed to address in a Budget, which has not been done seriously. 

[iii] Since end-2016 there were certain economic measures, but badly managed in implementation by the Ministry of Finance, thus causing a set back to the economy.
Principally, these measures were: (a) Demonetization, (b) Goods & Services Tax [GST] (c) Bankruptcy Code

[iv] The Ministry of Finance has brutally cut allocations year after year of the investments in infrastructure, despite the urgent need for such infrastructure. There is improvement, but not enough. 

The economy however needs about $1 trillion investment in infrastructure to render “Make in India” a reality, but the actual investment in sanctioned projects in valued is even less in real terms than the amount invested in pre-2014 years. 

[v] The manufacturing sector, especially MSME, which provides the bulk of the employment for the skilled and semi-skilled in the labour force, has been growing at abysmally low rates between 2 per cent to 5 per cent. 
For this the interest rates on loans to MSME should not be more than 9 percent. At present, MSME are lucky if loans can be got for less than 14 per cent.

[vi] India’s agricultural products are among the cheapest in the world, and despite a low yield per hectare, we are not able to increase the yield to its potential maximum and thereby at least double the production and export the agricultural products abroad commensurately. 

[vii] When crude oil prices have steeply fallen over the four years since 2014, and despite the dollar value of the rupee had till mid 2018 been steady around Rs.65/$, nevertheless both exports and imports, have declined over the three years 2014-17. Therefore, today to claim to have reduced CAD in the balance of payments accounts is trivial.

Today in 2019, the Indian economy is facing a 180 degree adverse situation: a rise in the Re/$ rate to 75 and crude oil prices rising in $ per barrel. This is putting massive pressure on our foreign exchange reserves.

Thus, the present possibility of an economic crash should galvanise us to review honestly the way we have governed, and thereafter achieve higher growth rates of 10+ percent annual growth in GDP with structural changes.

The BJP government also needs to give an alternative ideological thrust to economic policy, rather than trying to improve on the past failed UPA economic policies, as is presently being done. The individual has to be persuaded by the government by incentives and not by coercion.

Author is a MP nominated by the President to the Rajya Sabha in recognition for his eminence as an Economist. He is a former Union Cabinet Minister for Commerce & Law, and Professor of Economics