Union Budget 2022 did not propose any significant economic, financial and tax reforms measures. This was quite telling, especially keeping in mind the NDA government’s budgets of the last few years, which were full of policy initiatives.
Budget 2022 did not talk about real progress and issues in implementing any of the major policy initiatives announced in Budget 2021 – privatisation of banks and insurance companies, monetisation of assets, reforms of agriculture and food economy, labour reforms, opening up foreign investment, and so on. My fears expressed in an earlier piece about reforms petering out seem to be coming true.
Policy reforms are critical for generating high growth of the economy, eliminating multi-dimensional poverty and ensuring a good standard of life for people.
The pragmatic realisation of a $5 trillion economy by 2026-27 and a $10 trillion economy by 2035 critically hinges on a set of policy reforms that we choose carefully and then implement faithfully.
If a policy reforms stasis sets in, we are in for big trouble. We cannot allow that. It is too costly for the future of 135 crore Indians.
What Happened to Doubling Farmers' Income?
The government had earlier announced its policy goal of doubling farmers’ income, which required fundamental reforms in agriculture policies.
The Gross value added (GVA) in agriculture, forestry and fisheries in constant 2011-12 prices, was placed at Rs 16.09 lakh crore in 2013-14, the year before the NDA Government took over in May 2014. The GVA of this segment was placed at Rs 21.19 lakh crore for the year 2021-22 in the first advance estimates released on 7 January 2022. Farmers’ income, assuming all the gross value added went into increasing farmers’ incomes only, grew by only Rs 5.1 lakh crore, which is only 30% more than in 2013-14.
The goal of doubling farmers income has been missed by as much as 70%.
The agricultural sector has been in dire need of serious policy reforms. It required reform of the agriculture procurement system, especially the food procurement system. The policy of minimum support prices (MSP) is intended to ensure that farmers get a decent profit margin/value embedded in the MSP. The best way to provide the embedded profit margin is to give it as a direct cash transfer to the farmers and leave them free to raise whatever crop they get the best returns for from the market. Instead, we have built a gargantuan, largely dysfunctional, MSP-based procurement system, which results in annual wastage of Rs. 2 lakh crore, equal to a third of the output market value of wheat and rice.
Agriculture Sector Was Ignored in Budget 2022
The government tried to give farmers marketing freedom legally and institutionally by bringing the three farm laws. While the design of the marketing reforms was flawed, the government got cornered and had to repeal these farm laws. After this setback, agricultural reforms seem to have become a completely touch-me-not subject.
Other much-needed agriculture reforms, such as replacing subsidies in numerous inputs (such as water, electricity, seeds, fertilisers, etc, which don’t actually benefit farmers in the form of income) by direct cash support to the farmers have seen only marginal action, and have now seemingly been put on the back burner.
Finally, encouraging and facilitating the migration of a majority of more than 20 crore workers, trapped in agriculture as farmers and agriculture labour, out of agriculture to industry and services would have helped in doubling the income of farmers who remained in agriculture. Not much has been done on this score.
While agriculture policy reforms – of a mostly flawed type – occupied a place of pride in all previous budget speeches, the agriculture sector received short shrift in Budget 2022. The government neither mentioned the status of the promise of doubling farmers’ income nor express any intent to undertake any agriculture reforms in future.
Agricultural reforms seem to have entered a state of policy stasis.
Privatisation Has Been Slow
Privatisation of public sector undertakings, opening up Indian industry to foreign and domestic competition, undertaking reforms to eliminate the extra cost of doing business in India and modernising labour laws for the 21st-century economy are the principal reforms that India needs to awaken the ‘animal spirits’ of the Indian industry and labour.
The privatisation agenda had received a major boost in the 2021 budget, with the government firmly deciding to sell two public sector banks, one insurance company, and complete privatisation of eight major transactions, including that of Air India, BPCL, CONCOR and IDBI Bank.
Air India’s privatisation has been successfully done, though it has come at a heavy cost, with the government writing off equity of about Rs 50,000 crore and taking over Rs 85,000 crore of debt.
But the privatisation of no other transaction has progressed.
How the Govt Is Helping Build a 'Non-Competitive' Industry
Major requisite policy actions, such as amending the bank nationalisation rules for the privatisation of public sector banks or institutionalising a truly free petroleum product pricing regime for the privatisation of BPCL, have been initiated.
While government representatives are making formal noises about continuing with the privatisation programme, the lack of real progress in undertaking requisite policy actions indicates that the government is unlikely to proceed with any serious privatisation in its remaining two years in office.
Frequent upward adjustment in customs tariff, several non-tariff actions under the rubric of the ‘Aatmnirbhar Bharat’ narrative and the exclusion of foreign participation in many government procurements have been cited frequently as steps towards building a non-competitive industry instead of a competitive one.
A Manufacturing Slump
India is getting decent foreign direct investment (FDI), mostly in the start-ups and services sectors. Yet, the investment in manufacturing has been very low, making the share of manufacturing in GDP stagnant.
India is nowhere close to its manufacturing attaining a 25% share of India’s GDP.
The goal of reducing the cost of doing business has not materialised on account of lack of progress in power sector reforms, building reforms and in banking and financial sector reforms.
Numerous labour laws were consolidated into four labour codes. Though the consolidation in itself was no real reform, there has been no progress in implementing these laws, which were passed two years ago.
The Production-Linked Incentive (PLI) scheme sought to cover up the extra cost of doing business in India in 14 specific sectors. There has been good progress in some sectors. However, PLI schemes are not reforms. These are incentive-driven investments, which will have only a limited impact.
Not policy stasis, but a lot of stagnancy has permeated into the arena of industrial and labour sector policy reforms.
ECLGS Is Not a Credit System Reform
The government had amended the RBI Act, equating digital rupee with physical banknotes, and exclusively authorised RBI to issue digital rupee (the government would not be required to be consulted even for its design and denomination). There are numerous designs, use-cases, targeted users, technology choices, models, media of using digital currency, etc, which would need to be thought through, experimented and worked out. This will take years.
The government continued with the Emergency Credit Line Guarantee Scheme (ECLGS) as its policy choice for credit expansion. The amount covered by the government guarantee was enhanced by Rs 50,000 to Rs 5 lakh crore, though the enhanced amount was limited to only the highly stressed, contact-intensive hospitality and related sectors.
The ECLGS use has tapered off in 2021-22, with disbursements amounting to less than Rs 3 lakh crore, despite being in operation for more than 20 months.
In fact, ECLGS has substituted bankers’ credit judgement and risk assessment with a government guarantee. This is not a reform of the credit system but quite the reverse of it.
The government has made a provision of Rs 15,000 crore in the 2022 budget to cover credit guarantee losses. The ECLGS is likely to leave the banking sector quite bruised as non-performing loans in this portfolio start piling up.
Bad Bank and NaBFID Have Moved Slowly
Two major initiatives taken last year – establishing a bad bank as an asset reconstruction company (ARC) and a National Bank for Financing Infrastructure Development (NaBFID) – have moved slowly. The government has continued with the full provision of Rs 25,000 crore for NaBFID in the revised budget, though it is unlikely to disburse even half the amount provided.
The loans the bad bank would take over from PSBs are guaranteed to be to the extent of over Rs 30,000 crore, signifying another government interference in the financial sector.
The monetisation of infrastructure assets, to be undertaken as part of the Rs 6-lakh-crore National Monetisation Pipeline (NMP), is moving painfully slow, with only two transactions of a total asset value of about Rs 12,500 crore having been completed, against the target of Rs 80,000 crore for the year 2021-22.
Don’t Let Policy Stasis Set In
The BJP government, in both its terms, has been a single-party majority government. Prime Minister Narendra Modi is extremely popular, capable of taking bold decisions and exudes enormous confidence.
But as I present in my book, The Ten Trillion Dollar Dream: State of Indian Economy and Policy Reform Agenda, the most popular leaders have not necessarily been great for the Indian economy.
Jawaharlal Nehru’s policy choice of a socialist pattern of society, the exclusion of the private sector in most of basic industry and the concentration of production function in the public sector led to India getting trapped in a low-growth cycle.
Indira Gandhi’s maniacal nationalisation of the private sector and the licence control raj made India miss the growth bus in the sixties and seventies.
Now, if the government, led by Narendra Modi, takes its eye off policy reforms and allows the economy to dither, India may perhaps witness the 2020s becoming a low-performing decade.
Don’t allow economic policy stasis to set in.
(The author is an economy, finance and fiscal policy strategist. He has been Secretary, Economic Affairs and Finance Secretary to the Government of India. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)
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