Budget 2021: A Pivot Point For India

In the economic history of a fast-growing nation, there are always pivot points. If the right decisions are made and enlightened policies are implemented, the economic destiny of the nation is changed. Else, the morass continues.

I firmly believe India is at that pivot point.

The decisions that the Government of India makes with respect to fiscal 2021-22 will have long-term implications, a whole lot longer than the policymakers believe, or understand.

Do not let the equity markets fool you. Do not let large growth quarter over quarter growth numbers fool you either – those are just base effects. The long-term challenges for the Indian economy are real. More importantly, there are policy choices the government can make—today—that will give India a fighting chance of getting back to its 7-8% trend growth rate. But it will require will and focus to do anything meaningful for the real economy rather than rely on the elixir of an even higher Sensex.

The 2021 budget offers the government an extraordinary opportunity to define its ambitions and what risks it is willing to take to make those ambitions come true.

Let us rewind the tape a bit. The Indian economy was already slowing from its fast-paced growth before ‘Covid’ was a word. A combination of economic and policy decisions made in the middle of the decade had a far-reaching impact: Economic growth was slowing down by 2-3% even before Covid-19.

For an already slowing Indian economy, the impact of the pandemic has been devastating. Irrespective of the official statistics, for an informal economy like India’s, the negative impact effectively is immeasurable.

Unfortunately, if the economic policy issues are not addressed quickly and head-on, consequences that were short term in nature and which could or should have been addressed will turn into unsolvable long-term problems. The world and India will be over the coronavirus at some point but for the current economic hysteresis to not become a long-term problem, the 2021 budget will prove to be a very important milestone.

So, what exactly should be done?

While hundreds of policy prescriptions have been offered over the last few months, if you boil things down, the most important ones can be summarised into a handful.

1. Not A Time For Fiscal Consolidation

While the fiscal challenges are real and substantial, they can not be the singular focus. As Kristalina Georgieva of the International Monetary Fund recently said, “‘please spend’. Spend as much as you can and then spend a little bit more." There is enough liquidity and surplus capital around the world to support whatever reasonable ambitions the Indian government has. Do not go overboard, but at the same time recognise that the Indian economy needs demand support and not doing more on that front would be a dereliction of economic responsibility and will have long term consequences.

The economy that was slowing before Covid-19, and the ensuing pandemic-related slowdown does not make the challenge any easier. While an expansionary fiscal policy is important, ensuring that it goes to the right places in the economy to have more impact on end demand in the near term is equally important.

Spend whatever you need to support income and consumption across the impacted groups and it will pay rich dividends over the long term.

2. Biggest Long-Term Challenge Is Slowdown In Investments

Certainly, an expansionary fiscal policy on that front certainly helps, it can never be enough. At the end of the day, credit growth and demand is the ultimate driver of investments. But that can’t happen in an environment where the structural impediments to credit growth are real and substantial. Crucial decisions with respect to recapitalisation and consolidation of banks, non-performing assets, and the impacted industrial houses have to be made. They have been pending long enough with only incremental progress over the last few years.

There are tens of proposals out there as to what the government can do to get credit growth going but it always comes down to a political calculus. Is the government of India willing to take those political risks to reform the banking sector and get investments going again? We have talked enough about the alternatives; it is really a question of making and implementing hard decisions rather than policy arguments.

3. Infrastructure Spending

This is an evergreen tool available to emerging market economies that want to prime the pump from an investment standpoint. It is a relatively easy solution to get spending to increase demand and improve longer-term productivity growth.

However, for the infrastructure spending to have any significant impact in the near term, the money must be spent quickly.

Therefore, involving state governments in this policy venture would be crucial. The central government must provide the money to the states to spend on those types of projects rather than the money be held at the centre and spent slowly. This spending can be substantial, and immediate and help the economy in the short and long run.

4. Double Down On Structural Reforms

Over the last few years, the government has proposed some important, relevant long-term reforms for the structure of the Indian economy, including agriculture. We can argue about the process and implementation, but I do not think one can be intellectually honest and claim that these reforms will not be good for the economy in the long term. The near-term blowback from the status quo and current stakeholders will be real but at the end of the day, India needs structural reforms and there is no better time than now.

Whether it is the agri sector, or banking, or healthcare, the opportunities are immense, and they have the potential to lead to a significant uptick in the Indian trend growth rate. We will eventually come out of the Covid smackdown, but the long-term outlook is critically dependent on these structural reforms.

For a large and diversified economy like India’s, there are plenty of other policy decisions that can have a meaningful impact. The irony of all of this is we have debated them enough. We have a pretty good idea of what needs to be done. It is more a question of working on them assiduously.

Krishna Memani is a veteran global fund manager, and was formerly the vice chairman of investments at Invesco.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.