The annual Budget deals with allocating money to areas where GoI thinks it’s essential to spend, and finding out ways to finance it. The government primarily requires money to spend on social infrastructure, physical infrastructure, and transferring funds to the poor and deprived through various schemes.
The general assumptions underlying a good Budget are that it contains fiscal deficit, carries on with necessary reforms, beefs up consumption and investment expenditure, and curtails non-planned government spending while increasing revenue receipts. There are five components of demand: consumption expenditure, investment expenditure, government expenditure, exports, and imports, with consumption expenditure accounting for 60% of national income. Unfortunately, consumption expenditure is not growing because of lack of jobs and a general economic slowdown.
There is excess capacity in the manufacturing sector. Agriculture and construction are not performing either. During March 2019, investment as a proportion of GDP stood at 29.8%, much lower than the 15-year average of 34.8%. India’s trade balance recorded a deficit of $15.4 billion in May 2019 and is likely to worsen.
Because of the erratic climate, water shortage and a fall in agricultural productivity, rural consumption is down. 2013 onwards, the real estate sector, which used to be the mainstay for converting agricultural labour to construction work, has not performed.
Unlike in China, where a major portion of growth is driven by foreign direct investment (FDI), in India, it’s driven by domestic consumption. FDI in manufacturing is a distant reality for India, given the problem with land acquisition and labour laws. Of late, FDI has fallen, with a December 2018 number putting it at 1.6% of GDP against a 15-year average of 2.4%.
All this should serve as a potent recipe for finance minister Nirmala Sitharaman as to in which sectors GoI should intervene, and how. In the recent past, the government machinery performed well when it came to interventions in the social sector.
Apart from Swachh Bharat, schemes such as rural electrification and affordable housing were able to generate employment, income and better healthcare. Reform measures, such as the introduction of GST and the Insolvency and Bankruptcy Code (IBC), have, to a certain extent, reduced the cost of doing business.
India also performed well in the World Bank’s 2019 ‘ease of doing business’ ranking. The rise in composite ranking, however, hides certain sectoral ‘unease’ effects, such as higher logistic costs and delay in enforcing a contract.
These structural hurdles can be reduced by bringing in reforms in labour laws and making land acquisition easier. To procure agricultural land for non-agricultural purposes, for instance, farmers have to be made stakeholders. They can be given part of the land in a developed form, or proceeds from the sale of land that can be put in interest-bearing bonds, so that the farmers needn’t protest against high land prices subsequently.
To rein in fiscal deficit, it is necessary for GoI to start liquidating inefficient public sector banks (PSBs) and public sector undertakings (PSUs). This can happen in a phased manner. The Public Enterprise Survey 2017-18 points out that the top 10 loss-making PSUs account for 84.71% of the total losses — a signal where to start the privatisation drive.