Finance Minister Nirmala Sitharaman is getting ready to present her first Union Budget and her task is well cut out. The Reserve Bank of India's Monetary Policy Committee (MPC) has pointed out that while inflation is under control, there are clear indications that the economy is losing traction. Before the MPC meeting, the Central Statistical Office had released quarterly GDP figures, which showed that India was growing at its slowest pace in four years. Even private consumption, robust in earlier years, was losing steam. As it is, in Prime Minister Narendra Modi's first term, exports and private investment had refused to take off. What held up the economy was government spending on infrastructure and social programmes, and private consumption.
Even when the economy was growing faster, other issues were cropping up. Different studies suggested that not enough jobs were being created to take care of the additional workforce that was joining the economy every year. The non-performing assets, or NPAs, on books of banks, especially the government-owned ones, were reaching alarming levels. And agricultural distress was shooting up, despite government initiatives. The Insolvency and Bankruptcy Code, passed as a law, is expected to solve the NPA problem to an extent but will take more time to settle down. Meanwhile, other issues are cropping up - the trade war initiated by the US, primarily against China but also against India and other countries, is creating uncertainty. Worse, there are signs that global economic growth might slow down in the next few years.
When the interim Budget for this year was presented in February by Piyush Goyal, standing in for the then Finance Minister, Arun Jaitley, the government was obviously hoping for better conditions. It set a fairly high tax collection target and promised to spend a lot more to keep the economic engine humming. It cannot get out of its spending promises because its resources are low. The problem is that tax collections are widely off the mark compared to targets, and the leeway to spend more seems limited, unless the government finds new ways to raise resources or cut expenditure or both.
Several economists and analysts have given suggestions to the government. Here are mine. With a strong majority for the next five years, the government is ideally placed to take long-term steps and tough decisions. First, it needs to take the scalpel to wasteful expenditure, especially with too many loss-making PSUs. Does it really need to continue running Air India, MTNL, BSNL and dozens of other PSUs that are in distress? Running a loss-making PSU means less money spent on more important things. Even when some of these spends are not shown directly in the Budget, the money used to prop up these PSUs is still guaranteed by the government and shows up as extra-budgetary spending. Some of these PSUs may fetch next to nothing in a garage sale but it is still better to get rid of them than holding on with no clear idea if they can be turned into profitable companies.
Two, government agencies and PSUs have plenty of land that can be monetised. Land sales by the government have always led to controversies, and it will do so this time as well, but if anyone can afford to ignore critics, it is Prime Minister Narendra Modi with his strong mandate. Land sales can generate the kind of resources the government needs to tide over the tough times.
Three, while most businessmen support Mr Modi and the NDA government, they are also worried about frequent policy changes and flip flops. The refrain I have heard from different interactions with businessmen and trade associations is that the government needs to fix a policy for a sector and communicate to the industry that it will remain unchanged for at least the next five years. No businessman, even someone with cash on balance sheets, wants to invest without being assured that the policy will not change by next year. While this is not something that is part of the budgetary allocations, earlier governments have often used Budget speeches to signal policy intents - and that can be done in this one as well.
Then there are the contentious reforms in agriculture. The government does not lack expert advice - it has plenty of recommendations from some of the best minds in agriculture. The problem is that all governments try to look for quick solutions when what is needed is deep structural reforms. The first term of Prime Minister Modi saw the government trying higher minimum support prices (MSPs) as well as direct money transfer to poor, land-owning farmers. Neither are long-term solutions to agricultural or the broader rural distress and the problem of rural incomes not going up sufficiently.
For a broader set of agricultural reforms, there are steps the Union government can take by itself, and others that it needs to take along with state governments, like it did while bringing in GST.
In taxes, while indirect tax reforms were ensured through GST, direct taxes and Customs duties still need reforms. These are part of the finance minister's remit and Finance Minister Nirmala Sitharaman could start with these. Experiences in other countries have shown that tax buoyancy goes up when taxes are reduced. Reducing direct taxes could also increase the tax base, which has always been the bane of all finance ministers.
There are plenty of good suggestions given to previous governments and finance ministers. The problem has been that few had a mandate strong enough to take tough, long-term decisions. Prime Minister Modi has been voted back with an enormous majority and has the space to carry out the kind of financial reforms India needs to get back to the high-growth trajectory and remain there.