Budget: Letter To FM

medium117644120Dear Finance Minister,You must be flooded with advice on what to do in the Budget. I am wary of adding to your burden but unable to resist. So, here are three suggestions at a macro level.First the big picture. In his landmark budget of 1991, one of your illustrious predecessors Manmohan Singh famously invoked Victor Hugo to say no force on earth can stop an idea whose time has come. The big idea then was to ignite animal spirits in the economy by freeing it from socialist shackles.What’s your big idea now? Viksit Bharat? If so, what is govt’s concept of Viksit Bharat and what’s the game plan for getting there? Apart from some sporadic pronouncements such as the recent one by PM that youth must step out of their comfort zone to build Viksit Bharat, we have no clue. It’ll be a good idea to situate your annual budgets in the context of Viksit Bharat.Let me present the broad contours. Our per capita income today is $2,697 (IMF: 2024) whereas the IMF benchmark for a high-income country is $23,380. RBI research (India@100 - RBI Bulletin, July 2023) shows the economy will have to grow at 7.6% per annum over the next 25 years to achieve that goal by 2047.How realistic is that possibility? Resorting to IMF data again, the economy clocked growth higher than 7.6% just seven times since the 1991 reforms. And we could never sustain that pace for more than two consecutive years.Some economists believe the economy has now moved up to a structurally high growth trajectory. You have echoed that view. But 7.6% for over two decades on a trot? It’s clear that’s not going to happen under the ‘business as usual’ model.Mere growth won’t do. We need to ensure benefits of growth are widely shared. That is to say we need to focus on reducing inequality. Inequalities are not just morally wrong; they are also bad economics. The huge consumption base of the bottom half of our population is our biggest growth driver. If they earn more, they will spend more which will in turn spur more production, more jobs and higher growth. If we can’t put more incomes into their pockets, it will be a huge missed opportunity.A big question then for the way forward to Viksit Bharat is how do we sustainably accelerate growth rate and ensure benefits of growth are widely shared? How about an announcement that you will commission a study on a medium-term budget strategy for Viksit Bharat? Such a perspective is important — both to guide you on your series of annual budgets, and for us, the larger public, to hold you to account on your performance.Let me now move to my second suggestion that has to do with jobs.As research by Prachi Mishra and others has shown, in a labour abundant economy like ours, perversely, capital costs less than labour. A consequence of these distorted relative prices is that producers prefer to use more machinery and less people. This cannot obviously be corrected by tinkering at the margins. It needs structural fixes. Since there is no Viksit Bharat without jobs, the study you commission should focus on how to create productive jobs.And now to my third, and admittedly very unoriginal, suggestion — on fiscal responsibility.You have shown credible commitment to fiscal consolidation under trying circumstances including during Covid, and you deserve compliments for that. But it’s too soon to declare victory. Our debt-to-GDP ratio, currently at 80%, is well above FRBM target of 60%. Both at Centre and in states, interest payments on accumulated debt are eating into funds available for productive expenditures. Clearly there is need for greater restraint on borrowing.I need not go into the full agenda for fiscal consolidation. That’s familiar fare anyway. But I want to pick on one issue — the growing tendency of freebies. In a poor country where millions struggle to make a decent livelihood, transfer payments to the most vulnerable groups are necessary, indeed even mandatory. But competitive populism like what is unfolding of late is fiscally perilous, possibly even inimical to our long-term growth and welfare.Some time ago, PM decried the revdi culture but hadn’t followed up on that. Given the pressure of vote bank politics, no single political party will voluntarily adopt restraint. Centre needs to take the initiative. How about an announcement in the budget that Centre will initiate a dialogue with state govts and all political parties to work out a code of conduct on freebies?Before I end, let me say I understand the burden of expectations on you. But as they say, burden falls on these shoulders that can bear it.My best wishes to you as you prepare to present what I hope will be a big idea budget.The writer is a former RBI governor