On February 1, the Finance Minister of India will present the fourth budget of Prime Minister Narendra Modi’s second term. Despite the fact that the two-year term has been taken away by the pandemic, the government’s record on economic recovery has been quite credible.
Being a mid-stream budget, no path-breaking reforms can be expected; Rather, carry forward the previous policies. However, COVID has seriously changed the economic and social landscape. The Economist describes this as a period of “forecasted unpredictability”. Globally, inflation has reared its ugly head, driven by sustained periods of lax monetary policies in advanced economies, and exacerbated by supply-chain glitches and chip shortages. Ultimately, this trend will affect India, as well as the steps taken by the US Fed to control inflation.
Therefore, the budget will have to proceed in three ways: first, to accelerate inclusive growth; Second, maintain stability; And third, expand the reforms.
In 2021, India saw the largest number of digital transactions in the world, thanks to major government initiatives, leading to a high degree of financial inclusion. Unified Payments Interface (UPI), several startups and the traditional financial sector also contributed. The UPI platform can be used to reach out to the poor and improve the ease of doing business. Skills programs and a new digital university could add to human capital.
The unpredictability induced by the pandemic has compressed demand. This limits the scope for immediate private investment in additional capacities. Thus, sustainable development will require continuous investment in infrastructure. The National Infrastructure Pipeline and Gati Shakti are important initiatives. But long-term finance can only come through a strong bond market. This requires a number of initiatives, such as the inclusion of Indian bonds in global indices, credit enhancement mechanisms, and deepening of the bond market. Also, there is a need to increase the available space for non-Indian resident holdings of domestic corporate bonds.
Limited government capital expenditure will have to be used innovatively. For example, rural development provisions, such as those for rural employment guarantees, can be partially used to build rural infrastructure such as village-level warehouses. This will create sustainable rural employment and improve agricultural income. Similarly, capital expenditure on defense can be directed at domestic manufacturing.
Housing is one sector that is lacking in demand. But ownership patterns are changing. The younger generation is mobile and does not want to be tied to the house they have bought. Rental housing is an idea whose time has come. It can meet the housing needs of a very wide section of the society. However, the paradigm is changing here, and scrutiny of financing needs as well as good quality regulation of the country’s rental market may be required.
Given the fiscal constraints, tax cuts are not expected. Continuing with the tax stability regime will encourage the corporate sector to invest once consumer demand picks up. However, some anomalies in the tax regime need to be corrected. One of them pertains to long-term gains on bonds. On indirect taxes, the supply chain will remain stable by not raising customs duty on any new item.
Fintech firms have been the glamor boy of the stock markets in 2021-22. His contribution towards financial inclusion, technology inclusion in the financial sector and making transactions easier for common citizens has been exemplary. But as their balance sheets grow larger, it is important that there is less regulatory arbitrage between regulated entities and fintech firms. That is the job of the regulator, but the policy direction in the budget will reduce risk perception.
Disinvestment is an important part of the reform process. The sale of Air India has given a big boost to the privatization programme. This year, it will be looking to take further steps towards minority stake sale along with sale of some public sector banks and central public sector units. I see the potential to rise 3 trillion in 2022-23.
The last two years have seen a huge expansion in the borrowings of both the central and state governments. With rates likely to rise, we need to avoid the ‘crowding out’ effect that such lending inevitably causes. Development calls for investment. Once the fiscal deficit is contained and there is enough room for private sector borrowers, the private-investment cycle will begin. It calls for defining a glide path for a return to strict fiscal-deficit targets.
Atanu Chakraborty is the chairman. HDFC Bank Limited
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