Far from projecting an imminent v-shaped recovery, the budget should be conservative in its growth and revenue assumptions, while coming clean on the actual deficit numbers.
Even as the next Union Budget is hardly three weeks away, one thing is clear: There’s not much it can do to spur an economic recovery in the immediate term. The reason for that isn’t just the limited fiscal and monetary space available for stepping up government spending (without putting public debt sustainability at risk) or further slashing interest rates (in a scenario of rising inflation expectations from higher food and fuel prices). But equally important is the state of private investment. Only a handful of Indian corporates today are really in a position to infuse promoters’ equity in big-ticket projects costing, say Rs 10,000 crore or more. Nor are there many banks willing to finance the debt portion. This story — lack of confidence, if not ability, among both promoters and lenders — is the opposite of what it was during the investment boom of 2004-2011. And when consumers, too, are feeling the pinch and not opening their wallets, it adds to an overall dismal picture.
In short, far from projecting an imminent v-shaped recovery, the budget should be conservative in its growth and revenue assumptions, while coming clean on the actual deficit numbers. These would mean providing fully for unpaid food and fertiliser subsidy dues; not resorting to “off-balance sheet” expenditures through borrowings forced on the likes of National Highway Authority of India, Power Finance Corporation and Indian Railway Finance Corporation; and moving from a “cash” to “accrual-based” accounting of revenues and expenditures. Greater accounting transparency, along with focusing on the revenue as opposed to fiscal deficit, will do a lot to inspire market confidence. For investors, what matters is not the headline deficits as much as credible fiscal consolidation that frees up resources for the private sector. The same goes with grandiose plans such as investing Rs 102 lakh crore in infrastructure over the next five years. From a credibility standpoint, it is better to focus on completion, kick-starting or achieving financial closure on a few large projects — the Dedicated Freight Corridor, the Mumbai-Nagpur Super Communication Expressway and the Noida International Airport, for instance. It’s when people actually “see” these get off the ground that confidence will truly return.
Linked to this is a related point. If the road to recovery is long, the Narendra Modi government has to recalibrate its political strategy as well accordingly. The obsession with winning every next election, big or small, makes the ruling party do things that may attract votes in the short term, including through communal polarisation. But these will not help the economy, which has already suffered shocks — whether from demonetisation, goods and services tax or the ongoing anti-Citizenship Amendment Act protests — and cannot possibly take more. It is in both the Modi government’s and the BJP’s interest to bring the focus back on the economy, which will yield political dividends in 2024.