Expert Speak India Matters
Published on Jul 02, 2019
Since data has changed, there are only three words that should define Finance Minister Nirmala Sitharaman’s Budget 2019 — growth, growth, growth.
Budget 2019: Sitharaman should embrace inflation to deliver growth

Sitharaman stands at crossroads — already in a slowdown, the Indian economy, of which she is a major custodian-manager, could be headed towards crisis levels. The choice before her is simple. Either she can wait the crisis out with a business-as-usual Budget but follow through with other reforms to prevent it from becoming the monster it did in 2008-09. Or, she can pre-empt the crisis and cushion the economy before the crisis hits home. We believe, Budget 2019 should go easy on economic players without being hard on government finances. And she must put all her hare-brained ideas such as universal basic income in the nearest shredder.

Barring a steady and strong political stance following Verdict 2019, Sitharaman sits in a place that gives her little room for manoeuvre. But the same politics could be her strength to push for hard reforms. In her first Budget, to be placed before Parliament on Friday, she needs to break out of past narratives on three economic indicators — GDP growth, inflation rate and fiscal deficit — and study them afresh.

In fair-to-good times, the way forward along this troika is clear: high economic growth, low inflation and low fiscal deficit. But, internally and externally, times are uncertain at best and crisis-level at worst. Sitharaman’s budget, we hope, will capture both these economic influencers and deliver what the Indian economy needs — a Budget that acts as a stimulus to growth, catalyses employment, and allows for a little inflation as it has the leeway to do so.

In other words, she can break out of the low fiscal deficit discipline. She can also allow the inflation rate to rise. But both these fiscal sacrifices must be made to ensure that economic growth hits double digits, bringing jobs and prosperity with it. The only way this is possible to by embracing entrepreneurs. Else, the $5 trillion GDP by the next elections in 2024 will remain just that: an aspiration (from $3 trillion to $5 trillion by 2024 implies a growth rate of 10.8%; from $3 trillion to $10 trillion by 2032 needs a growth rate of 9.7%). In the two months since the new government took charge on that hot 30 May 2019 evening, new data has come and raised the economic temperature to levels of concern. It is this data on the home front and harsh global economic reverberations of uncertainty, particularly on higher oil prices, that should change Sitharaman’s Budget narratives.

GDP growth

Within a of two months since the new government was sworn in, its first and crucial challenges are firmly in place. The economy has slowed down — at 5.8%, India’s GDP growth for the quarter ended March 2019 is subdued; growth rate for the year ended March 2019 is 6.8%, still enviable by global standards of similarly-sized economies, but not enough for India’s growing needs. The crown of the world’s fastest-growing economy has shifted, again, to rival China, but which is expected to grow by 6.0-6.5% in calendar 2019. Going granular, sector after sector, from automobiles to infrastructure and agriculture to non-banking financial companies, is sending signals of worry, seeking relief.

Sitharaman needs to act before these trickle down and turn into a vicious cycle. In its previous term, former Finance Minister Arun Jaitley had argued that higher tax collections were a signal of growth and jobs. Now that the GST collections have fallen, the converse argument holds equally strongly. Growth, therefore, must be the single economic driver of her Budget — redistribution and social welfare schemes that is the political currency of India need growth for sustenance.


The political expression of an economic slowdown — jobs — is staring us in the face. In particular, unemployment among youth (15 to 29 years) is distressingly high. According to the Periodic Labour Force Survey for July 2017 to June 2018, released in May 2009, youth unemployment ranges from 13.6% for rural females to 27.2% for urban females (the numbers for rural and urban males is 17.4% and 18.7% respectively). When the young don’t get jobs, it hurts the hopes of a young nation.

Number to number, jobs are down, though the government says the latest jobs data cannot be compared with the previous one, due to a change in methodology. At an anecdotal level, the trickle of contract workers being eased out, if not tackled with urgency, could mushroom and transform into protests on streets and street-fights in Parliament. Jobs is a political necessity, for which growth is the economic precursor.


As the sole economic indicator that makes electoral sense, the government has been able to bring down and keep down the inflation rate. At 2.9%, the Consumer Price Index is in tune with the Monetary Policy Framework Agreement, signed on 20 February 2015 between the government and the Reserve Bank of India, which ensures the rate shall be 4% with a band of plus-minus 2%. The government has perused the low inflation target with such intensity that it has become the new normal — contrast these with the high rates between 2009 and 2014, when inflation rates were often in double digits. The ideal state of economic indicators is high growth with low inflation.

But in a crunch, as we are in today, managing high growth and more jobs must take precedence over low inflation. The rate above may be revised temporarily, for say two years, to make higher inflation in tune with the law. Remember, however much we may condemn the high inflation years of the UPA government, it delivered the highest growth rate of India — it is on the shoulders of that growth that India stands as a $3 trillion economy and dares to dream about being a $10 trillion economic powerhouse by 2032.

Fiscal deficit

Once the Ministry of Finance decides to deliver growth and jobs and is comfortable with slightly higher inflation rate, the Budget must look within and destroy traditional narratives of low fiscal deficit. By its very structure, a high fiscal deficit is inflationary — you push money into the system through borrowings that pushes up prices of goods and services in the economy. In countries where the basics are in place, such a relationship will work. In India, home to the world’s second-largest number of poor who need to be pulled out of poverty, only economic growth can deliver such a policy outcome.

Tolerating a little inflation in the pursuit of growth through fiscal expansion, therefore, will dispense returns within this electoral cycle, and well before the next elections. Sitharaman’s direction is clear — she can take the fiscal deficit beyond the current 3.4%, enable growth and then allow that growth denominator to fix the ratio. Further, the rise need not be directly proportional to requirements — disinvesting public sector enterprises through offers for sale or strategic sales would cushion the borrowings, and she would need to make flexible provisions here, depending on how the markets value these enterprises.

Beyond the fiscal-inflation sacrifice — the sufficient condition for growth

A higher fiscal deficit and inflation are necessary conditions for growth — but in themselves, they are not sufficient. The last and most important part of disrupting the inflation-growth equilibrium is wealth creation. Over the next few months, Sitharaman will need to work on two crucial reforms — land and labour — to attract entrepreneurs into the economic discourse. For this, she will need to step out of North Block and engage with the Prime Minister’s Office across the road, the Ministry of Labour on Rafi Marg, and Chief Ministers of BJP-governed states. While land is a state subject under the Constitution, Sitharaman has an advantage here, given that 16 or more than half the states are under the governance of BJP. And labour: does India need 37 central laws here?

On the financial side, Sitharaman will have to work with the Reserve Bank of India to kickstart lending, through a mix of capitalising banks and non-banking financial companies. The money a looser fiscal target will unleash needs to be used productively, of which financing infrastructure stands on top as the biggest enabler of growth. Further, she will need to de-bureaucratise doing business, perhaps as a precursor to the tougher administrative reforms. Finally, and this is most important, she and Prime Minister Narendra Modi’s government need to stop looking at entrepreneurs as potential criminals — every business failure is not a fraud, every bad loan not corruption.

The choice before the country is clear — catalyse wealth creation, create jobs, increase taxes on the one side and embark on efficient redistribution of wealth to eradicate poverty on the other. On the latter, successive governments have proved their mettle, across infinite schemes. But on the former, the policy direction has generally lagged the market, and the nation’s needs. It is up to Sitharaman to change this stance and open the floodgates of business enthusiasm. She needs to get wealth creators into action so that governments can deliver wealth redistribution. Without wealth creation the previous two parts — high inflation and high fiscal deficit — will spiral India towards a macroeconomic tragedy.

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.


Gautam Chikermane

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Gautam Chikermane is a Vice President at ORF. His areas of research are economics, politics and foreign policy. A Jefferson Fellow (Fall 2001) at the East-West ...

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