A Budget blueprint for difficult times

Praveen Chakravarty
Manmohan Singh
P. Chidambaram

JANUARY 30, 2021

Alarming inequality, failing health care and border tensions loom large and the economic situation needs full attention

As the country prepares to enter a new financial year after an ominous and gloomy 2020-21, there are great expectations about green shoots and the shape of the economic recovery. The havoc wreaked by the novel coronavirus pandemic on people’s lives and livelihoods is deep and enormous. The impact of the COVID-19 induced lockdown cannot be understood merely through headline macro-economic numbers of Gross Domestic Product (GDP), stock market indices, industrial activity indices or any such measure. COVID-19 has destroyed lives and incomes; it has also ruptured our social fabric. It has exacerbated the inequality between the haves and the have-nots , which can turn into a permanent scar if not remedied urgently. It is in this context that we must assess the current state of the economy and evaluate further action for the immediate future.

Missed opportunities

The sudden onslaught and rapid spread of COVID-19 have devastated most nations. Yet, we believe India could have done better. A better planned lockdown by being sensitive to India’s unique conditions of a large migrant and informal workforce could have reduced the deep distress in the labour market. A responsible and generous fiscal aid package would have soothed millions of struggling families, brought food to starving homes and contained widening inequality. The Reserve Bank of India’s actions to supply enough liquidity were laudable, but they were inadequate.


One of the most telling signs of the economic desperation of Indian families was — and is — the demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) programme . After being mocked by the Prime Minister , MGNREGA, by providing work at minimum wages to anyone that asked, has proved to be the only safety net for hundreds of millions of Indian households during these times of severe distress. Nearly 120 million people have asked for work under MGNREGA this financial year, the highest in the history of the programme. Total work demanded under MGNREGA in 2020-21 is 53% higher than last year. The optimism about headline economic recovery in the last few months seems hollow when we realise that nearly 35 million people have requested MGNREGA work in the months of December and January, the highest in the last six months. Such continued high demand for MGNREGA work at subsistence wages is a clear sign that there is no true economic recovery, let alone a ‘V’ or any other letter shaped.

Even as hundreds of millions of Indians were struggling with loss of jobs and MGNREGA work, India’s stock markets were exuberant and reached record levels . India’s stock market indices are at the highest levels ever. The top 50 companies increased their market wealth by nearly ₹3,00,000 crore ($40 billion) during this time. The excess liquidity pumped in by central banks is finding its way to asset markets, including India’s stock markets, driving it to unreasonable highs. If the stock market exuberance were to benefit the broader economy and most Indians, then it is welcome. Alas, the benefits of rising stock markets have accrued only to a minuscule few. The curative economic measures of governments in response to the COVID-19 pandemic may have unintentionally caused one of the worst phases of economic disparity between the rich and the poor in most nations.

Threats and weaknesses

Soaring asset prices and supply shocks have also led to a rise in consumer price inflation. Rising inflation will inevitably force the RBI to tighten interest rates or at least pause the lowering of rates. A tighter monetary policy carries the risk of slowing down private investment, with the consequential effect of lacklustre growth in jobs and wages. India’s macro economy is, thus, precariously poised and needs deft handling.

The external sector could be a potential saviour of India’s economy as global trade grows from its post-COVID-19 lows. Unfortunately, however, the government has shot itself in the foot by reversing its trade policy suddenly and turned inwards toward import substitution, quantitative restrictions, non-tariff barriers and shunning trade alliances. Over the past three decades, a surge in labour intensive exports has been the predominant driver of growth in jobs and wages for millions of high- and low-skilled Indians. The slowdown in exports and the misplaced aversion to two-way external trade will further harm the livelihoods of many Indians.

India’s fiscal policy response to the COVID-19 shock has been underwhelming. The lack of a basic minimum income safety net to cope with the shock has plunged millions of families into poverty. As of December, 12 million adult Indians have dropped out of the labour force compared to last year when, given India’s demographic profile, there should have been a net addition to the labour force. Unemployment in the formal sector too is very high. Most supply-side measures such as the government’s corporate tax cuts, loan moratoriums, and guaranteed credit schemes seem to have helped corporates to boost their profits and reduce their debt. They have hardly been used to make new investments or create jobs or increase wages.

Besides, in continuation of previous policy catastrophes ( demonetisation , muddled Goods and Services Tax), the government has sought to thrust ill-thought policies such as the controversial farm laws on the nation, with no consultation or discussions. As a result, the lone bright spot in the economy thus far — agriculture — has also been wrecked with rising anger among farmers, confusion over farm produce procurement, doubts over the continuation of Minimum Support Price, and a loss of trust between farmers and the government.

The other fiscal measure to aid the needy is to embark on a large-scale public investment programme that can stimulate economic activity, create jobs and revive demand.

However, the government’s fiscal situation is bleak. The government had budgeted to collect tax revenues of ₹16-lakh crore in 2020-21. Eight months into the year, the government has been able to collect only ₹7-lakh crore in tax revenues at the end of November 2020. In contrast, the government had budgeted to spend ₹30-lakh crore this financial year and is on track to fulfilling, and even possibly exceeding, its expenditure budget. We believe that the government was right to not cut back on expenditure despite falling revenues during a time of unprecedented crisis, though we may differ on the priorities of expenditure. Therefore, India’s fiscal deficit is bound to rise significantly. We can live with it provided there are smart responses to inflation and future borrowing.

The non-negotiables

The government’s task is cut out. Given the reality of an unequal economic recovery, a misconceived trade policy and a perilous fiscal situation, the government will have to unveil its economic plan for the next financial year and the two remaining years of its term. There are some non-negotiables in economic planning for the next year.

The COVID-19 pandemic has exposed the multiple lacunae in India’s public health infrastructure and served a stern warning that nothing is more important than increasing health-care expenditure and ramping up the health infrastructure. The central government’s Ministry of Health and Family Welfare’s budget has to increase from the current levels of roughly ₹70,000 crore (2% of total expenditure in 2020-21) to at least ₹1,00,000 crore.

Since May 2020, India’s borders have been under threat by the Chinese. Any weakness will invite a war. India must immediately shore up its defence preparedness and be ready to defend its borders. India’s defence expenditure as a share of GDP has been falling. The government must increase defence expenditure from the current level of 1.6% of nominal GDP to 3% of nominal GDP in the next year, keeping in mind that the GDP will be lower than the level attained in 2019-20.

There is no credible evidence yet that bankers are willing to lend and borrowers — especially corporates — are willing to make fresh investments. A rising interest rate environment, a financial sector choked with record non-performing loans and weak consumption demand implies that a pick up in private investment cannot be assured. Hence, public investment must step in to do the heavy lifting and pull the economy from its current dismal state. Expanded public investment can provide jobs and stimulate demand, the two most pressing needs of the country today. The central government’s capital expenditure must be increased significantly from the level of ₹4 lakh crore (14% of total expenditure) in 2020-21 to at least 20%-25% of total expenditure.

A basic income safety net

Any increase in the government’s public investment will take time to translate into jobs and incomes for large numbers of the labour force. So, there is an immediate need for a basic income safety net for the bottom half of India’s families for a six-month period, similar to the Congress party’s NYAY (or Nyuntam Aay Yojana/Minimum Income Support Programme) idea. We believe that an unconditional monthly cash transfer to the needier segments of the population will be the most efficient way to alleviate their miseries fastest.

The Budget that will be presented on Monday should be evaluated in this context and not as another routine Budget. Fiscal deficit and the threat of international ratings cannot dictate India’s economic policy in current times of deep distress when lives, livelihoods and the nation’s security are at stake. The situation is so grim that it is not the time to experiment or play loose. Given the dire situation and the government’s penchant for rash policy announcements without a due consultative process, it is best to self-impose a moratorium on new laws, ordinances or bills for the next one year. We simply cannot afford to get distracted when the economic situation needs full and exclusive attention. For the sake of the nation’s future, we hope the government will embark on steering the economy in the right direction.

Dr. Manmohan Singh is a former Prime Minister of India. P. Chidambaram is a former Finance Minister of India. Praveen Chakravarty is a senior office-bearer of the Congress party


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