A quick snapshot of the numbers lay out the latter quite succinctly. Total budgeted expenditure, including extra budgetary resources (EBR) — essentially, resources mobilised by PSUs for specific capital expenditure projects — at Rs 40.66 lakh crore is a little less than RE for this year ( Rs 40.96 lakh crore). Even for this Covid-wracked year, a large chunk of enhanced expenditure was on account of balance-sheet clean-ups — bringing FCI borrowing within the budget and settling subsidy arrears of the past. In other words, the fiscal boost is limited to keeping spends on an even line even as the denominator (GDP) has fallen from fiscal 2020 levels. This alleviates, substantially, foreign investor concerns on macro stability, thereby keeping foreign flows at even keel.
Both are good for business and capital markets. A stable tax regime helps businesses and boosts consumer confidence. A glide path on the fisc, along with a material shift of the outlay towards capital expenditure, keeps a degree of priming required to sustain industrial recovery. That is, equity markets caught on to the right signals on budget day.
A K-shaped recovery has been underway for the last few months. While the top half of enterprises and consumers seems to be seeing a smart pick-up in economic activity, the bottom half has struggled with job and income losses. With the twin ‘non-decision’, the upper hand of the ‘K’ has been given a tailwind. So, what happens to the bottom hand?
There are a bunch of announcements relating to what ex-chief economic adviser Arvind Subramanian describes as ‘software’ of the economy — a ‘bad bank’, or asset reconstruction company (ARC), a new development finance institution (DFI), a new programme on chronic power sector losses. All of them are unexceptionable. But their impact depends on execution, legislative work outside the budget — and they need time. None of them are quick wins that will have immediate impact on the pressing issue: aggregate demand.
Most high-frequency indicators tracking employment show widespread job losses. Add to it the withdrawal of the incremental Covid boost in the primary income support programmes — MGNREGA, PM-KISAN — and there is likely to be a negative fiscal impact of incomes at the bottom of the pyramid. Going by the budget numbers themselves, GoI does not expect aggregate demand to materially exceed FY2020 levels. Remember, FY2020, pre-Covid, was one of the direst slowdowns in India’s post-1991 history. So, what gives?
One assumption could be that GoI has faith in supply-side measures pushing along a cyclical recovery, which was anyway expected after the bottoms of FY2020. Some factor market reforms had already been introduced last year, especially in labour and agriculture. Corporate tax was cut in the previous budget. Privatisation announcements have been made with increasing visible activity over the last 18 months. The budget took forward the momentum via insurance FDI hike, and further announcement of privatisation of State-owned banks and insurance companies. The problem with this assumption is that the supply-side script has been played for at least 2-3 years, but growth has still been weakening.
The other assumption would be of ‘trickle down’. A bunch of market-friendly measures boost sentiment, attract foreign investment and create wealth in the top half (or even quarter) of the pyramid. ‘Animal spirits’ are unleashed, the wealth effect drives consumption across a range of discretionary products and services, and, finally, a part of it trickles down to the bottom half of the pyramid, pulling them up via creation of jobs in revived construction and manufacturing sectors.
‘Trickle-down’ has been a bad word in policymaking for some time now. But India’s best performance in poverty alleviation took place when the economy grew at a fast pace. It is now well established globally that the rich are well immunised from macro swings of fortunes. The poor, especially in (relatively) low-income countries like India, are a lot more vulnerable to income shocks arising out of poor growth. Ergo, an elite consumption and risk-taking fuelled growth is better than low or no growth.
It wouldn’t satisfy the purist. But in a world of bounded rationalities, it is a fair bet — letting the K bend itself into a U.
The writer is chief information officer (CIO), ASK Wealth Advisors.