Budget 2019 Provides No Workable Solutions to the Current Economic Crisis

The 2019–20 Union Budget is a missed opportunity to initiate reform in India's economy.

The Union Budget 2019 was presented against the backdrop of a downturn in the global economy. This budget needed to deal with a number of urgent issues like skyrocketing unemployment, a growing fiscal deficit, and inequitable and slowing rates of growth. The government needed to take cognisance of these issues and present measures that would correctly address them. However, as was previously pointed out in the Economic & Political Weekly, this would be a difficult task in the absence of reliable data. This budget was prepared keeping in mind a shortfall in actual revenue collection. Therefore economists have questioned the allocations made to various sectors, which they have criticised for being unrealistic. While fiscal consolidation was trumpeted as the main objective of the budget, it was pointed out that “a close look at the estimates shows an increasing resort to obfuscate the deficit estimates.”

Economic & Political Weekly’s Budget Special has analysed the budget for this year in a set of seven articles by domain experts who have looked at the various problems with the Union Budget 2019. The general view of this budget has been that it is disappointing, and that its capacity for reforming the economy is insufficient. Questions about its credibility and the government’s commitment to welfare have also been raised. 

In this reading list, we have highlighted the most pressing issues that were pointed out in the Budget Special.  

1) Charting a Path to ‘High Growth’

Nirmala Sitharaman, in her budget speech, credited the private sector, “India Inc.” as being the nation’s wealth creators, and said that with “mutual trust,” India would achieve sustained national growth. However, K P Kannan questions the finance minister’s praise of the private sector. From 2012 to 2018, the economy witnessed a loss of 31.8 million jobs, of which 29.3 million jobs were lost in the agricultural sector. Kannan argues that the government today is reluctant to fund public schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which could boost employment. 

The allocation this year (2019–20) at Rs 60,000 crore is less than the actual expenditure of Rs 61,084 crore during the last year. There is an impression that the current regime is not interested in continuing this public employment scheme that has a certain dignity (self-selection and a legal entitlement) and local relevance(employment within 5 km radius) ...  Last year, the beneficiaries were 52.8 million persons (with 51 days on average of employment), that is to say, just 17% of the estimated total workers in rural areas at 311.3 million in 2017–18 … The story is the same with regard to other rural development schemes that are either entirely for the rural economy (for example, the Pradhan Mantri Gram Sadak Yojana, theNational Rural Drinking Water Mission) or substantially for rural areas (as in the case of housing, health mission, and the Integrated Child Development Services or ICDS) that could help create more jobs. In fact, the allocation for the Ministry of Rural Development at Rs 1.2 lakh crore is higher only by 4.8% compared to the previous year. But, in real terms this works out to an increase of a pitiable 0.8% after adjusting for inflation.

Further, Kannan writes that the government is fixated on the idea that labour reform—making the labour market more flexible for capital to invest—is the cure to employment woes. He argues that the recently introduced Code on Wages and the Code on Occupational Safety, Health and Working Conditions (OSH) will negatively affect informal workers in both the formal and informal sectors.

The Code on Wages mandates a national minimum wage (that could be taken as a floor wage) below which no state or the central government should fix industry-specific or state-wise minimum wages. However, the issue of fixing the minimum wage has been left to the executive which is contrary to the principle of “need-based” ... Workers in the informal sector or those who work as informal, often as casual workers in the formal sector (for example, construction) are at a loss as to what will happen to the welfare boards and funds created on an industry-wide basis. In sum, the message is loud and clear. The path to high growth needs to be paved with cheap and pliable labour for the private corporate sector, the India Inc, with borrowings from abroad and assisted by a freer and easier entry of foreign capital to the Indian economy.

2) The Current Economy Is Not Conducive to Privatisation

C P Chandrasekhar writes that through the 2019 Budget, the government sees its role as facilitating private investment. However, Chandrasekhar argues that the country’s current financial health is not conducive to private investment, which requires robust infrastructure. A persisting agrarian crisis, industrial slowdown, and a sluggish service sector may stall private capital inflow. 

The conventional view is that since infrastructural projects require large, lumpy investments and are characterised by long gestation lags, so tax- or debt-financed public expenditure must lead growth in that sector. But, unwilling to tax and having embraced fiscal conservatism, which requires reigning in the fiscal deficit and public borrowing, the government finds that infrastructural shortfalls have become too large to be ignored. 

To boost private finance in infrastructure spending, the Budget recommends increasing limits of foreign portfolio investment (FPI) in projects, increase foreign shareholding of companies from 25% to 35%, and also provide credit guarantees to allow private investors to share and transfer risk. However, Chandrasekhar contends that infrastructure is a risky area, and the proposed measures would prove ineffective to spur investment. 

What all of this ignores is the fact that much of FPI investment in India is in secondary markets. If that continues, even if investment flows into the country increase, new investment would not be financed, especially in a risky area like infrastructure. On the other hand, liberalisation of the kind proposed would give space for speculative players and instruments that are opaque and known to be risky … taking this risky and possibly ineffective route to stimulating investment and growth, does not resolve the problems created by the fiscal crisis the government faces. Not all activities of the state can be “privatised,” so it would still have to be an important presence. That presence has to be financed, so resources need to be mobilised …  The government has also decided that it would reconsider its view that it should hold a majority stake of at least 51% of equity in public sector enterprises.

Given this uneasiness in the public–private relationship, the current government intends to invest Rs 100 trillion in infrastructure.  However, Partha Ray writes that the budget is silent on how to spend this money.

The budget has not spelt out any vision about the ways and means to achieve it and merely announced the government’s intention of setting up an expert committee “to study the current situation relating to long-term finance and our past experience with development finance institutions, and recommend the structure and required flow of funds through development finance institutions.” After the effective closure of development finance in India over the years, it remains to be seen what new initiatives the government takes to unclog the sources of long-term finance.

3) Developing the Social Sector

The 2019 Union Budget allocates Rs 64,559 crore to health and family welfare, more than double of what was allocated to this sector in 2013–14 by the United Progressive Alliance (UPA) government. The budget has also increased funds allocated to the Pradhan Mantri Jan Arogya Yojana (PMJAY)—a part of the Ayushman Bharat scheme—from Rs 2,400 crore in 2018–19 to Rs 6,400 crore. However, S Mahendra Dev argues that this is inadequate. Dev argues that to achieve the PMJAY’s target of Rs 5 lakh insurance cover to 10 crore families, Rs 1 lakh crore needs to be earmarked for this scheme. 

There is no alternative to the universal health coverage, including the primary health centres, if one needs to accomplish the goals of the health sector. There are supply-side problems, the health infrastructure of India. India has 16 health workers (doctors, nurses and midwives)per 1,000 population, contrary to the World Health Organization’s (WHO) recommended norm of 44.5 health workers per 1,000 population (Reddy 2019). The ratio of nurses and midwives to doctors is 1.7 as compared to the recommended ratio of 3:1. As Dréze (2018)mentions, Ayushman Bharat trivialises India’s quest for universal healthcare. He also says that a massive increase in public health expenditure and a radical revamp of primary health infrastructure are needed for moving towards universal health coverage. It is thus essential to increase public expenditure and provide accessible, affordable and quality health coverage to all.

The budget also provides nearly Rs 95,000 crore for school and higher education, Dev argues that this is inadequate. six per cent of gross domestic product (GDP) should be spent on education, rather than the current proposal for 3% of GDP. Further, the budget also highlights skill development as necessary, but provides no road map for training the labour force.

It is known that with demographic dividend, there will be large numbers joining the labour force. India will be the world’s youngest country by 2020 with an average age of 29 years. This “demographic dividend” comes at a time when the rest of the world is ageing. Some estimates show that only 2.3% of India’s workforce has undergone formal skill training compared to the United Kingdom’s (UK) 68%, Germany’s 75%, United State’s (US) 52%, Japan’s 80% and South Korea’s 96% (Niti Aayog 2017). In order to have structural change from agriculture to non-agriculture and from unorganised to organised, education and skill improvement are needed. Government initiatives on skill development have so far yielded slow progress. 

4) Necessary Reforms Missing

M Govinda Rao argues that in the absence of a dedicated plan to accelerate a slowing economy, the government’s ambition of reaching a $5 trillion economy by 2025 will remain a pipe dream. Rao writes that the government needs a road map to solve India’s twin balance sheet problem, which will allow banks to lend, and industries to borrow. 

The government has, yet again provided ₹ 70,000 crore of taxpayers’ money for recapitalisation, but has not initiated the much-needed reforms in the governance structure of public sector banks. There is an urgent need to distance the functioning of the public sector banks from the government and the consolidation of some banks is not going to solve the problem … The Infrastructure Leasing and Financial Services (IL&FS) crisis has brought to the fore the serious lapses in both governance and regulation in non-banking financial companies (NBFCs). There are failures in auditing and credit rating systems and proper and effective regulation. Even more importantly, there is a serious structural problem of time profile of credit–liability mismatch. The assertion that the NBFCs should continue to get funding from banks does not solve the problem of advancing short-term funds for long-term investments.

5) The Budget Lacks Transparency

Ashok Gulati writes that while the estimates accounted for in the budget are expected to be trustworthy, the numbers quoted are questionable. For one, Sitharam estimates the fiscal deficit at below 3.5% of the GDP, but the Comptroller and Auditor General (CAG) estimates it at 5.85% for financial year (FY) 2018, and a report by the Financial Express puts the fiscal deficit for FY2019 at 6.1%. Moreover, Gulati writes that the problem of questionable estimates has extended into the agri-food sector in this year’s budget as well.

The current budget provisions a food subsidy of Rs 1.84 lakh crore for FY2020, while the overdues of the FCI [Food Corporation of India] are already at ₹ 1.86 lakh crore. Thus, in the case of the food subsidies, there is more under the carpet than in the budget. An almost similar picture emerges in the case of the fertiliser subsidies. A provision of Rs 80,000 crore is made in the budget on this account. But the Fertiliser Association of India (FAI) claims that the government has not cleared their dues of Rs 38,000 crore, which by the end of FY2020 are likely to cross Rs 50,000 crore. Under such a situation, how can the budget bring any cheer to the fertiliser industry or for that matter even to the FCI?

Read More:

How to Make Budgets with a Dearth of Data | EPW Engage, 2019

Ideas and Ideal in a Budget | Gopal Guru, 2019

Growth-Oriented Budget An Analysis of Major Suggestions | I S Gulati, 1976

 

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