Privatisation is no longer a four-letter word. Along a long and winding road, and one which allowed India to contribute a word to the English language — disinvestment — Budget 2021-22 will begin the process of the withdrawal of the state from its extended stay. Bank nationalisation in 1969 signalled a new era — just more than 50 years later, India has changed course for the better. In India, unlike western economies, the budget is something beyond an accounting statement. If there was nothing else in the budget but just this change of a word, it would have been historic. But there was more, much more. Actually, if you ask me, with the benefit of five days of ex-post hindsight, as to what I would change in the budget, the answer would be — nothing. (And I have been watching and commenting on the budgets for the last 35 years, and continuously since 1997). Does that mean that economic reforms are complete? Of course not; but it does mean that the process towards the goal of greater economic freedom, and faster and more equitable economic development, and maturity, has well and truly begun.
For some time now, say the last two decades, a new world macro has been developing. Part of this new macro is that the fiscal deficit is no longer what it used to be. Discussions about fiscal deficits were the hallmark of a serious economist — his adherence to calculations of the fiscal deficit and worries about what would happen to inflation. In that regard, many of us forgot the original meaning of fiscal deficits and their importance. When you have unemployment, a considerable portion of deficit financing can go towards growth, rather than inflation.
In addition, inflation today is considerably more than a domestic matter — it is a global concern. The world has changed, and as part of the new macro environment we live in is the concern — definitely so in the advanced economies — that inflation is not high enough. The median inflation in developing economies in 2019, before COVID, was just 1.5 per cent above the low sub 2 per cent levels in the advanced economies. How post COVID the wage rate will rise enough to cause a sustained increase in inflation remains to be seen. But the writing on the global wall is: “High” inflation is not at all likely, and is not a concern.
The relegation of the fiscal deficit to a secondary role in economic policy was the second big departure from a conventional business as usual budget. Like the beginning of privatisation (or the beginning of the dismantling of the old socialist economic order), the beginning of the unimportance (within reason!) of fiscal deficit calculations was also a historic component of Budget 2021-22. The conventional argument, as articulated by many, was that fiscal deficit was something to really worry about, hence taxes must be raised to keep the deficit within limits. There was serious talk of a COVID cess, a wealth tax, and increase in the tax rate for the rich. We need to ask, as finance minister Nirmala Sitharaman has (indirectly) asked: Show me the evidence that increasing tax rates increases tax revenue. She took the extra-bold step of reducing corporate taxes in September 2019. India awaits a comprehensive reform of the Direct Tax Code, something I had argued, along with others. It did not happen. But the stage is set for such a reform.
Another historic first is the attempt to achieve transparency in fiscal math. One giant step for India. Translated, this means that for the first time, the budget is the old-fashioned (but not old) WYSWYG — What you see is what you get. If the government borrows from the Food Corporation of India (to finance MSP purchases, what else), it will now appear as part of expenditures and as part of the deficit.
An additional first, and here I am being just a bit speculative, is the GDP growth estimates for 2021-22, forecasted at 14.5 per cent (nominal). Normally, finance ministers in India tend to over-estimate, and most often, fall short. Budget 2021-22 might be the first to significantly exceed the forecasts. I did say speculative, but the recovery numbers are compelling. Nominal GDP growth of 20 per cent in fiscal 2021-22 is possible; around 18 per cent is likely. The conventional wisdom is of real GDP growth of 10-12 per cent; bump up that number by at least 2 percentage points to arrive at realism.
One strong indication that the budget was outstanding is the fact that critics, especially the habitual ones (and ones closely associated with the political opposition?), were reduced to stating that the budget forecasts would be in error because of problems of “execution and implementation”. That is not two problems, just one. Both mean the same! And what would be the problem in increasing expenditures on health, roads, electricity, capital formation? I have not talked about the large increase in the budget on capital expenditures or the increase in expenditures on health, and education, among others. If you don’t raise expenditures, then the complaint is that you are not doing enough for investment, for growth, for the poor. If you do raise capital expenditures, and in the desired sectors, then the argument is that you will not be able to execute.
This is similar/identical to another argument of the critics: India’s success in reducing the impact of COVID is not due to policies, but due to good luck. Not policy, not execution, but luck. Was it said, prior to September-October, that India’s COVID cases were “high” because of bad luck? Of course not. But it proves my point that if the only criticism of the budget is that of “execution/implementation” then there is universal agreement that Budget 2021-22 is historic.
I cannot remember the last time I was a witness to such a well-crafted budget — a budget that lays the foundation for sustainable recovery in GDP growth and welfare improvement. What is even more remarkable is that the good budget came in the year of the farmers protests. The government stayed the course of reform, despite extreme provocation. History will record the boldness, and India will benefit from the vision.
This article first appeared in the print edition on February 6, 2021, under the title “The good budget”. Bhalla is Executive Director IMF representing India, Sri Lanka, Bangladesh and Bhutan. The views expressed are those of the author and do not necessarily represent the views of the IMF, its Executive Board, or IMF management