Ministries that ask for money have to show that they have shovel-ready projects, notes Abheek Barua
How should you assess the quality of the next Union Budget, and give it a score on 10?
What would separate a mediocre workman-like Budget (a score of say five) from a truly stellar 'make' rather than 'break' Budget (eight-plus)?
Some of my peers seem to have reconciled themselves to a run-of-the mill Budget, high on the 'groan factor', full of minutiae and vague promises but low in terms of policy initiatives.
I don’t agree with them and would be sorely disappointed if this Budget did not at least aspire to a higher score than they predict. I say this for two reasons.
First, the economy hasn’t gathered even half the traction that some of us assumed it would just a year back.
Associated problems like the mounting pile of bad debt in the banks have grown in intensity.
Second, the solutions have been copiously discussed in both public forums and, I presume, internally in the government.
A majority of them lie in the finance ministry’s domain.
What better forum than the Budget to announce some of them?
Let me mention three sets of policies that I would be looking for closely.
To start with, I would look for ways in which the government plans to fund public investments in infrastructure.
The fact is that, with massive excess capacity in most sectors and hefty debt burdens, the private sector is unlikely to ramp up investment.
Thus it is up to the government to keep the investment clock ticking and find the resources to do so.
There is an ongoing debate on whether the government should renege on its commitment to fiscal consolidation (3.5 per cent of GDP for 2016-17) or play entirely by the book.
I find it difficult to pick a side here.
While I appreciate the fact that allowing the deficit to slip a little to fund capital spending doesn’t seem terribly irresponsible, I see two major counterpoints to this.
First, the global investment community (including the rating agencies) has shown considerable disappointment over the government’s inability to deliver on critical areas of economic reform -- the implementation of the Goods and Services Tax, land acquisition and so on.
Disappointing them yet again by slipping off the fiscal track could sour the sentiment against India further in a scenario where all emerging markets are getting beaten up.
Second, local bond markets are extremely apprehensive about an oversupply of debt paper with the likelihood of a hefty amount of UDAY bonds (to fund the power discom clean up) due to hit the markets.
Market liquidity is tight given sluggish foreign capital inflows and cautious monetary policy.
A slip in the fiscal deficit and the consequent bloat in borrowings could send yields soaring again.
The government needs to watch out for this.
One way to weigh the costs and benefits of veering off the fiscal roadmap is to ask the following question.
How much extra money would fiscal slippage release? My guess is that it would be somewhat small.
After all, the debate becomes a tad trivial when one sees the numbers getting mentioned.
The question is not about whether we allow a significant expansion, by say one per cent of GDP, but a much smaller amount -- in the ballpark of say 0.3 per cent.
The thing to really focus on is whether the finance minister chooses to marshal all the off-budget resources potentially available to him and use them to spend on things like roads and power.
Will there be, for instance, a concrete plan to leverage the National Infrastructure Investment Fund capital base to get money to augment the equity of companies and financial vehicles, who could use this shot of equity to raise more funds through debt?
Will there a plan to (finally) sell the government’s stake in the much-discussed SUUTI?
Will Real Estate Investment Trusts finally get on the markets to get much-needed funds for the cash-starved realty sector?
Simply penciling in a large receipt under the disinvestment column lacks credibility.
We have to see concrete and diverse measures that could potentially show us the money.
The second critical policy challenge relates to the stressed loans of the banking system and this problem is clearly spinning out of control.
Two things are imperative to prevent our financial sector from just freezing over.
- First, the public sector banks need hard cash from the government to keep their capital bases in shape, to support growth.
Both the situation in the local and global financial markets and the state of bank balance sheets means that sending them to the market will be somewhat futile.
I think the government will also have to take the lead in beefing up the asset reconstruction process on a somewhat urgent basis.
The quickest way to do this seems to be the creation of a “bad bank” with the government providing the bulk of the equity. There is of course the moral hazard of bailed out banks repeating their mistakes.
That has to be prevented through regulation.
- Second, a system by which lenders and errant borrowers sit across the table and arrive at a settlement has to be put in place.
The bankruptcy code should address this -- but one cannot rely on the vagaries of the legislative process to get things done.
The UDAY programme is an indirect way of bring about a settlement: banks are forced to take a haircut on their asset yields while states that sign up will (hopefully) be forced to adhere to the stringent conditions that could improve their credit-worthiness.
- Finally, the Budget should pay as much attention to the 'absorption' of budgetary funds as it does to allocation.
Ministries that ask for money have to show that they have shovel-ready projects.
Otherwise we might see a Budget that looks good on paper but achieves little in reviving the economy.
Abheek Barua is chief economist, HDFC Bank
The image is used for representational purpose only. Photograph: Reuters