This year’s Union Budget—the 11th in a row from the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA)—is being presented in the backdrop of exceptional circumstances. Not only is a deeply divided world facing an unprecedented economic challenge that is being compounded by climate change, this is also the last regular Budget ahead of the general election next year.
Ever since the covid-19 pandemic struck in 2020, the world has been subjected to repeated shocks of unprecedented magnitude—the Russia-Ukraine conflict, followed by the ratcheting up of interest rates by the United States Federal Reserve, and most recently the fresh surge in the covid-19 pandemic in China.
The combined impact of the pandemic, geopolitical tensions, drying up of global liquidity and the commodity price shocks has brought the world-- including the United States, the largest economy--dangerously close to a recession.
However, Finance Minister Nirmala Sitharaman, will have cause for cheer. India continues to challenge this grim global narrative with its economy poised to log an impressive 6.5-7 percent growth in 2022-23. Even better, the Finance Minister has sufficient cause to believe that this is largely the outcome of the policy playbook the NDA adopted since it assumed power in 2014.
The New Playbook
Since it assumed power nine years ago, the NDA has sought to pivot the Indian economy. These policy changes have been appreciated and validated most recently, by the global investment banks, World Bank and the International Monetary Fund.
It began with the rollout of the Goods and Services Tax (GST)—the single biggest indirect tax reform—which, for the first time, economically unified the country. The GST principle, ‘One Nation, One Tax’, made the economy more efficient by dramatically reducing friction. Not surprisingly, monthly gross GST collections now average over Rs 1 lakh crore—in November the accruals to the exchequer was Rs 1.45 lakh crore.
To incentivise and revive private sector investments the union government slashed corporate tax rates to 22 percent from the prevailing 30 percent; in addition, it fixed a lower rate of 15% for companies incorporated after 2019—this scheme is extended till 2023.
Similarly, the passage of the Insolvency and Bankruptcy Code (IBC) in 2016, helped with the mitigation of the legacy bad debts of commercial banks. According to the Economic Survey of 2021-22, financial creditors recovered Rs 2.55 lakh crore, of the Rs 7.94 lakh crore debt owed to banks, at the end of 30 September 2021. This repair of the financial sector, which also included capitalisation of bank balance sheets, restored the ability of commercial banks to lend.
The NDA also undertook a major ideological reset after it formalised the policy of privatisation—the most recent example was the sale of Air India to the Tata group. Simultaneously the union government has taken to monetisation of idle assets owned by the public sector to generate funds for big-ticket Greenfield infrastructure projects—the underlying strategy is to crowd-in private investment.
The pursuit of fiscal prudence, unlocking of financial resources and buoyancy in tax collections has provided the wherewithal to the FM to fund infrastructure projects and the covid-19 relief packages.
More importantly, it is now evident that the structural reforms which improved economic efficiency, proved to be a buffer against the economic devastation unleashed by the pandemic.
Digital Public Goods
The Indian economy also received an unexpected boost from the rapid rollout of Digital Public Goods (DPGs) like Aadhaar, Unified Payments Interface (UPI), CoWin, Open Network for Digital Commerce (ONDC), Account Aggregators, Health Stack and Open Credit Enablement Network (OCEN), over the last decade.
These DPGs have been created as an open digital ecosystem, which enables the private sector to use these digital rails to create innovations in payments, health care and so on. At the same time, by dramatically lowering the cost of entry, these DPGs accelerated formalisation of the economy and democratised access to identity, covid-19 jabs, payments, credit and more recently e-commerce.
These public digital rails have also been used by the union government to accelerate the rollout of the Direct Benefits Transfer, estimated to be cumulatively over Rs25 lakh crore. The resulting disintermediation has also prevented leakages and savings to the exchequer upwards of Rs 2 lakh crore.
Further, these beneficiaries have become key stakeholders in the Indian economy—where previously they were outside looking in.
The onset of the covid-19 pandemic, consequent lockdown of the economy caused immense distress to both lives and livelihoods, not just in India but the entire world. Unlike other nations though, India did not opt for a fiscal stimulus to revive the economy.
Instead it pursued a calibrated strategy, wherein it initially focused on saving lives and then gradually put the spotlight on livelihoods—even while it bolstered the material basis of the vulnerable segments by rolling out the free food grain scheme for 80 crore people; which has now been extended till December 2023.
While this extraordinary social safety net together with the big push for providing electricity, drinking water, sanitation and housing for all, succeeded in mitigating damage to those at the bottom of the pyramid, the structural reforms has made the economy more efficient.
The impact is yet to manifest itself as the Indian economy was busy repairing the damage caused to the banking sector by an unprecedented surge in bad debts. Further, the back-to-back setbacks beginning with the pandemic, dampened the recovery process. However, with these one-off shocks fading the economy is poised for a rebound, providing a healthy backdrop for this year’s Budget.
Over to Finance Minister Nirmala Sitharaman.
(Anil Padmanabhan is a freelance journalist who tweets @capitalcalculus)