Despite her best efforts, Union finance minister Nirmala Sitharaman has not yet secured her place in the history books. It may not be fair to expect ministers in the Narendra Modi government to aspire for a place in history given the towering and overshadowing personality of the Prime Minister. But then, some finance ministers have been able to carve out a place for themselves with their proposals or at least their speeches. Dr Manmohan Singh’s 1991 Budget gave him a place in the history books long before he earned it again as Prime Minister with the India-United States civil nuclear deal. Palaniappan Chidambaram will be remembered for his “dream budget” that slashed income tax rates. Arun Jaitley will always be remembered for launching the Goods and Services Tax. Ms Sitharaman should also aim to leave her imprimatur on some idea.
The Covid-19 pandemic and the lockdown economics of 2020 have, without doubt, intervened to queer the FM’s pitch. We now know from official data that the economy has shrunk by close to 8.0 per cent, and that India is among the worst performing economies this year in terms of growth and employment generation. While all this has spurred the government into action, the fruits of much of this action will take time to ripen. The FM can spend money and secure early results and Ms Sitharaman has promised to spend a trillion rupees on infrastructure investment. Her fiscal management, praised and criticised in equal measure, can nurture the green shoots of economic revival, but with some inflationary consequences.
Opinion on such revival is sharply divided among the economy-watchers. While the finance ministry insists that the economy is on the rising arm of a V-shaped recovery, the government’s critics believe that the shape of the recovery is at best a W, with the spike in the middle a mere bump rather than pyramidical in shape. The real alphabet to worry about is K -- a mix of a V on top for some and an inverse-V at the bottom for others. Rising inequality, high levels of unemployment and the still hesitant improvement in investment suggest that some sections of society may well be experiencing a V-shaped improvement in their fortunes, but others are living through the downside of an inverse-V.
What ought to be the central message of this year’s Budget speech? Clearly, it will have to boost the confidence of all sections of society that the economy can return to the medium-term trajectory of 7.6 per cent growth experienced through much of the Manmohan Singh era (2004-2014). During Dr Singh’s first term (2004-09), the average annual growth rate was a record 8.0 per cent -- the highest in recorded history for a five-year period -- and in his second term (2009-14), it slipped to 7.0 per cent. The decline began in 2012.
While the Narendra Modi government has claimed that its growth record is no worse than its predecessor’s the fact remains that after six years in office it has not been able to turn the investment rate up. The percentage share of gross investment in national income (gross domestic product) fell to a low of 28.0 per cent, having climbed all the way up from below 30.0 per cent at the turn of the century to nearly 37.0 per cent in 2010. The government may have succeeded in getting consumers to consume, but getting investors to invest and savers to save remains a challenge.
In an essay written for a book I have recently edited on the post-Covid economy (Beyond Covid’s Shadow: Mapping India's Economic Resurgence, Rupa, 2021), Dr C. Rangarajan, a former chairman of the Prime Minister’s Economic Advisory Council, among other things, underscores the fact that the lockdown has weakened an already weak pre-Covid economy and the Budget has to kickstart economic growth by stimulating investment, savings, demand and employment generation. Kickstarting the trillion rupee infrastructure programme, along with the privatisation of public enterprises, increased spending on education, health, research and development and encouraging the growth of employment-generating sectors can restore momentum to the economy.
In his essay in my book, economist and Parliament member Subramanian Swamy bemoans the lack of strategic thinking on economic policy and recommends a balanced mix of incentives for savings and investment with a more open and competitive economy that increases productivity of capital. He believes that Prime Minister Modi has so far not been able to give a clear direction to the economic growth process. Rather than promise too many things to too many constituencies, this year’s Budget should define the roadmap to make India a $5 trillion economy by 2025. All policy must aim to serve that end. In their essays, both Bibek Debroy, currently chairman of the PM’s Economic Advisory Council, and Rajiv Kumar, vice-chairman of the Niti Aayog, assure us that the government is aware of the nature of the challenge and that it would address it convincingly to ensure the revival of growth.
However, not everyone within the so-called Sangh Parivar seems to be equally aware of the negative impact that the politics of the ruling party is having on the economics of its government. Experience around the world through the past century shows that sustained high economic growth is a function of domestic political stability and moderation. Even China’s growth acceleration began only after its domestic politics became more moderate and stable. The biggest challenge for economic policy today is not just to end the post-Covid and post-lockdown uncertainty but also for the Bharatiya Janata Party to re-establish its credentials in offering a development-oriented administration rather than one that is obsessed with divisive religious and communal issues.
Finally, a friendly word of advice for Ms Sitharaman. Get a good speechwriter. At least this year one prays that the FM’s mouth will not go dry and she runs out of breath reading a long, boring speech. Budget speeches are remembered both for content and style. A smart finance minister should get both right at least to earn good editorials if not a footnote in the history books....