Expert Speak India Matters
Published on Dec 01, 2022 Updated 19 Days ago
Finance Minister Nirmala Sitharaman’s fifth budget faces global challenges. She should leverage them and meet them head-on
Budget 2023 must factor in geoeconomic infiltrations When inflation is being imported because of a conflict that has nothing to do with India, risk money inflows facing a threat of pause as interest rates rise across the world, all swimming in a sea of slow growth, even contractions in some cases, a national budget can do little to manage domestic public finances. The one outcome it can deliver is to ensure domestic growth continues. For India, therefore, Budget 2023 must plug into a broader economic policy, the roots as well as the branches of which lie beyond the scope of the Ministry of Finance.

First, inflation

There is no idea that speaks a greater truth to power than high prices. Of course, this applies to democracies only, not authoritarian regimes such as China. High prices leave governing coalitions vulnerable to household discontent and political pressures within. These show up as slogans of change in the next election cycle. To say, therefore, that India’s inflation rate stands at around 7 percent today, from an average of 5 percent, and is not severe, is a fact. But this fact carries several threats within it. Containing these threats is, and will remain, the government’s big challenge, the biggest of which is managing energy volatility.

Buying oil from Russia and making it India’s biggest energy supplier in the short term, even while strongly advocating peace, is one step of that balance.

After an initial spike to almost US $130 per barrel in March 2022, a jump of 85 percent in just one month, the price of oil has fallen to the eighties (US $81.45). This volatility is riding the conflict between energy producer Russian Federation on the one side, and Ukraine— backed by Europe and the US—with sanctions that are hurting Europe more than Russia on the other. In between stands India, with stakes in both adversaries. The US and Europe are partnerships of values—democracies, rule of law, and a common adversary China. Likewise, the Russian Federation has been and remains a valued supplier of arms to India, particularly when the US and the West chose to support the terrorist state of Pakistan against India. It is this balance between the values and the valued that India needs to tread with care. Buying oil from Russia and making it India’s biggest energy supplier in the short term, even while strongly advocating peace, is one step of that balance. Energy shaming India has not worked so far; it will not work going forward. It is for Budget 2023 to ensure that supply side inflationary pressures remain under control. It needs to prevent the trickle up of rising prices into areas other than fuel. And even here, it is tasked with balancing tax collections, including from fuel sales, while ensuring that prices don’t get so out of control that it affects households. The job of Budget 2023 will be to keep domestic economic threats under control, even as the government does what it can to keep oil and gas supply lines going. On the food inflation side, India is comfortable. But it needs to ensure what’s produced is not wasted. Budget 2023 should demand efficiencies in food storage and, if needed, allocate funds to build new warehouses. Food prices today are no longer just an economic indicator; they equally feed into strategic stability indicators.

The Russian Federation has been and remains a valued supplier of arms to India, particularly when the US and the West chose to support the terrorist state of Pakistan against India.

Second, interest rates

Other than raising interest rates or reducing money in the system, such that households consume less and prices stabilise, the Reserve Bank of India can do little. But raising interest rates at a time when India is growing, building and expanding would harm this outlier performance. India needs to ensure that growth continues. There are enough dark clouds over the growth horizon, however. According to the International Monetary Fund projections, more than two out of five or 43 percent economies (31 out of 72) will see a contraction in their real GDPs in 2022-23. Three countries with GDPs of more than US $1 trillion each will be the worst hit—the Russian Federation is expected to contract by 2.3 percent, Germany by 0.3 percent, and Italy by 0.2 percent. As a result, central banks across the world have been raising policy rates. All large economies have increased interest rates in the past year. In September 2022 alone, the US and Europe raised rates by 75 basis points, India and the UK by 50 basis points. The policy rates in Brazil stand at 13.75 percent. Smaller countries such as Hungary in Europe are seeing interest rates climb to 13.0 percent, while Chile in South America is negotiating a 10.75 percent rate. The sole exceptions: China, Japan, Indonesia, Russia, and Turkey. The biggest risk on the interest rate side is the US. From near-zero, the US Federal Reserve has raised interest rates five times in 2022 to 4 percent. This means, a larger chunk of global money that seeks a risk-free return will shift to US treasuries. As a result, commercial banks will have to offer a return of between 7 and 9 percent. These will push the expectations from equity markets to 14 to 18 percent. And finally, it will impact the returns expectations from high-risk venture investments, which will rise to 23 to 25 percent. In economies that are contracting or slowing down, these are missions impossible. The upshot: A flight to safety will devour risk capital in the system, and through it the start-up ecosystem.

Taxes need to be powered by policy design that welcomes money, offers jobs, builds enterprises and creates wealth—and doesn’t distort the system through retrospective laws.

In this macroeconomic climate, the only way to protect India would be to push the pedal of growth even harder. Already the world’s fastest-growing economy, India will need to sustain the growth, if not increase it. Budget 2023 can help by clearing the pathways to growth. Other than tax reductions or incentives, it can demolish the red tape of Indian bureaucracy and turn it into a green carpet that welcomes not just hot money but long-term investment of companies, particularly the corporate refugees escaping China and seeking democratic and rule-of-law based geographies of scale.

Finally, the way forward

As part of ‘Jan Bhagidari’, the Department of Economic Affairs, Ministry of Finance, has invited suggestions from citizens to make the Budget-making process participative and inclusive. In that spirit, here are some suggestions for Budget 2023. One, Budget 2023 must create a system that is attractive to capital, domestic and foreign. Lower taxes alone will not help. Taxes need to be powered by policy design that welcomes money, offers jobs, builds enterprises and creates wealth—and doesn’t distort the system through retrospective laws. Two, Budget 2023 can only manage public finances of the Union government. The responsibility of taking policies and converting them into greenfield projects is of state governments. Given that there are four large BJP-governed states that have the ability as well as the will to invite and assemble investments—Uttar Pradesh, Gujarat, Haryana, and Madhya Pradesh—Finance Minister Nirmala Sitharaman should take the views of Chief Ministers Yogi Adityanath, Bhupendrabhai Patel (or whoever takes charge later this year), Manohar Lal Khattar, and Shivraj Singh Chouhan seriously, and, in tandem with these governments, create physical, regulatory and market spaces for businesses. Three, Budget 2023 need not pressure itself with fiscal balance. As the G20 Bali Leader’s Declaration states, governments need to work together to a “well-calibrated, well-planned, and well-communicated policies, with due consideration to country-specific circumstances.” This means, flexibility in fiscal policy response, ensuring that energy and food prices remain under control, and inflation stays low. For India, it means using public finances to build infrastructure, as was done in 2019 to manage the COVID-19 crisis. Credit rating agencies that carry anti-India biases will work themselves out. “India’s fiscal policy, therefore, must not remain beholden to a noisy/biased measure of India’s fundamentals and should instead reflect Gurudev Rabindranath Thakur’s sentiment of a mind without fear,” argues the Economic Survey 2020-21.

With the Nifty and the Sensex at their all-time highs and the budget just two months away, disinvestments announcements of the past can be fructified now, at higher prices, in this financial year itself.

Four, Budget 2023 should push hard on the disinvestment pedal. Despite the gloom and doom the world over, India’s markets are doing very well. With the Nifty and the Sensex at their all-time highs and the budget just two months away, disinvestments announcements of the past can be fructified now, at higher prices, in this financial year itself. Five, Budget 2023 should seed an Aadhaar-like identity infrastructure for companies. As Rishi Agrawal argues, every business should be given a unique enterprise number that will serve as its identity for all—repeat, all the 69,233—compliances, of which 26,134 carry imprisonment clauses. This number should be accepted by and applicable to all laws, rules and regulations at the Union level or in states. Such a system of doing business will increase the velocity and efficiency of G2C (government to company) communications, be it around setting up a plant, getting a bar licence or paying taxes—one number, one company, one nation. Finally, Budget 2023 must avoid the temptation to be populist. Unless they lead to more jobs or infrastructure, the budget must not reduce taxes. An economy on an upswing, an outlier across the world and expected to do only better, need not cut taxes as an incentive—those can be revisited if the economy falters. Of course, as far as household taxes are concerned, reverting to the three-slab structure from the current 11 slabs must be considered. For taxpayers, simplicity is better than complexity—three is greater than 11.
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