Revive economic activity to generate revenue

There is near unanimity that the Budget must signal a much higher level of healthcare spending to not just set right historical deficiencies but also address the glaring deficit in public healthcare that the Covid-19 pandemic has revealed. It is important to remember that India’s healthcare sector was severely deficient even before the pandemic came. Bangladesh, for example, is poorer than India but has a higher life expectancy.

Get it right: Working a way out of the economic slowdown will be a priority for the FM. PTI

Subir Roy

Senior economic analyst

What are the imperatives and compulsions under which the Union Finance Minister has had to work while formulating the 2022 Budget? Once we understand these, we will be able to make sense of the shape in which it finally arrives.

The foremost compulsion weighing with the Finance Minister is to be seen in control of the fiscal situation. There is every reason to believe that the fiscal deficit in the revised estimates for 2021-22 will not be way out in comparison to that in the Budget estimate of 6.8 per cent.

A degree of fiscal conservatism is part of the DNA of the country’s present rulers. They will stick to it despite the ravages of Covid-19 which can yield any number of good reasons and justifications to forget about fiscal rectitude and help the country spend its way out of the economic slowdown.

There are several good reasons why it is necessary to spend first and worry about the fiscal deficit later. The foremost is the slowdown in private expenditure which is having serious social consequences. Raghuram Rajan, former RBI Governor, is forthright when he notes that the pandemic has caused a sustained reverse migration from urban to rural areas after low-end jobs vanished in the former. India has a real consumption problem because the less well-off segments did very badly during Covid-19. This reverse migration has caused employment in agriculture to go up, a peculiar phenomenon absent in any other developing country.

To prevent this, India needs an urban safety net, an urban employment guarantee programme like the rural NREGA at a time when there is an imperative to also keep properly funded the rural programme for which demand remains higher than the pre Covid-19 levels. All this means there is a need to spend first to address social distress and worry about the fisc later.

But fiscal discipline cannot be thrown out of the window as that will work against the imperative of maintaining the confidence of markets. So, the foremost task before the Finance Minister is to be able to square the circle, so to speak — serve both the contradictory needs and do that by devising a credible pathway on how to get the economy back on track without appearing to be profligate.

The same attempt to harmonise action which exerts pulls in opposite directions is apparent in what the corporate lobby group, Confederation of Indian Industry, would have the government do. It wants a growth-oriented Budget which will rejuvenate demand, facilitate private investment and boost job creation. And even while doing so, it doesn’t want the government to lose sight of fiscal management. This seems a bit like wanting to have your cake and eat it too.

While most commentators want to balance the implications of what they would like the Budget to do (the plus and minus of raising spending), there is one clear imperative before the government which few will question. This task is of such paramount importance that, if necessary, the government will have to print money to deliver on it. This is the need to set right the healthcare sector which has come out severely bruised while trying to cope with the pandemic.

It is important to remember that India’s healthcare sector was severely deficient even before the pandemic came. Bangladesh, for example, is poorer than India but has a higher life expectancy which is indicative of being served better by its healthcare sector. Indian healthcare does even more poorly in comparison with another neighbour, Sri Lanka.

In order to set this right, the government has to spend much more than it does. According to the latest (2017-18) data available, the Indian government spend on healthcare works out to 1.35 per cent of the GDP which many experts believe should go up to 2.5 per cent. Unless this is done, the out of pocket expenditure that Indians have to incur on healthcare will remain high. The out of pocket expenditure of Indians, to meet the essential expenses for services that are unavailable from the public healthcare system, is 49 per cent of the total spend, when for China (according to World Bank data) it is far lower at 36 per cent. Poor Indians sometimes relapse into destitution as a result of having to cope with a health emergency with their own resources.

There is near unanimity of opinion that the Budget must signal a much higher level of healthcare spending to not just set right its historical deficiencies but address the glaring deficit in public healthcare that the Covid-19 pandemic has revealed. With the memory of people dying due to lack of oxygen and inadequate hospital capacity in speciality care like ICU beds and ventilators still fresh, these issues have to be focused upon and for that a sharp rise in public spending is essential.

On top of all this, Assembly elections are around the corner in five states and Opposition parties have made generous promises of what goodies they will distribute if they come to power. In this scenario, there is pressure on the government to come out with its own promise of goodies for UP, for example, in the Budget, irrespective of how much of it will eventually be forthcoming.

One way of meeting the pressure to raise spending is to raise more resources. But again, there is near unanimity of opinion that the Budget should not sharply raise taxation rates. Rather, it should spend and help revive economic activity which will in turn bring in more tax revenue.

Another way to raise more resources is with the help of the central bank — issue government securities to RBI and use the proceeds to meet expenditure. But that avenue is virtually closed as ever since the pandemic arrived, central banks across the world led by the US Fed have followed a very easy money policy (created liquidity through open market operations).

Those good days are over. The US is faced with historically high levels of inflation (in India, it is currently also on the higher side). So, there is widespread expectation that the days of easy money are over, central banks will raise interest rates to suck in liquidity and it is in anticipation of this that securities markets across the world are tumbling.

So, the Finance Minister has realistically a single option before her. Raise spending in the hope that it will revive economic activity which will bring in more revenue through the latter part of the financial year. This is being on a wing and a prayer while formulating the Budget!