Finance Minister Nirmala Sitharaman presented the Union Budget for FY2022-23 in Parliament on Tuesday at a time when the economy continues to recover from the pandemic. This is the ninth full Budget of the government under Prime Minister Narendra Modi which was elected to power in 2014 promising to deliver ‘minimum government, maximum governance’. In a conversation moderated by Prashanth Perumal J., Sanjeev Ahluwalia and Shruti Rajagopalan discuss how well the latest Budget delivers on that promise. Edited excerpts:
How well has this Budget delivered on the government’s original promise of ‘minimum government, maximum governance’?
Sanjeev Ahluwalia: ‘Minimum government, maximum governance’ is a difficult objective to achieve in India, where the government is so prevalent at all levels of polity. I think a great deal of progress has certainly been made by the Modi government to formalise and measure improvements in governance. But whether or not this government pushes forward the agenda of ‘minimum government’ is a little more difficult to gauge because of the circumstances. There is a coordinated shift towards bigger governments across the world than you would have thought normal, say, a couple of decades back when deregulation was in vogue. Also, don’t forget that there is a great deal of increased protectionism across the world, not just in India. India is just following the trend and there are some geopolitical concerns that also feed into whatever actions thegovernment takes. We are continuing to take strides towards becoming a more private sector-oriented economy. Some legal changes have been made recently which aim to provide greater certainty to private investors. At the very least, there’s nothing in the Budget that detracts from what we have done in the past.
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Shruti Rajagopalan: I differ from Sanjeev on this. My version of ‘minimum government, maximum governance’ is to think about what the role of the state is. If I were to think about a minimum state, it would be some version of a night-watchman state, which provides public goods such as law and order and leaves the rest to the private sector. On this account, I have largely been disappointed with this government. Instead of providing public goods, the emphasis has been to provide private goods more efficiently. So, for instance, the emphasis has been to provide subsidised LPG and build toilets for certain groups. But these are not your classic public goods. Second, I don’t see a major rollback in economic controls, although I do think the government tries to streamline them. For instance, instead of going to multiple different windows to get your clearances, now you only need to go to one window or two windows. But that is still very much an attitude of the economics of control. Third, the idea of ‘minimum government’ would mean systematically rolling back the footprint of the public sector. But this government has simply not had a good record on disinvestment. Air India has been a big win in terms of privatisation. But largely, when it comes to the big promise that was made to privatise a lot of underperforming public sector organisations, I don’t see much headway being made.
The Finance Minister mentioned that thousands of laws and compliances have been either repealed or reduced over the last few years. What impact has this had on the ground?
Sanjeev Ahluwalia: Along with the repeal of all these various constricting regulations, and the single-window approach, there has been a general trend of, for instance, criminalising what should be civil offences. But one of the great pushes that the government has been able to do is to digitise government processes. While there are privacy concerns, digitisation does facilitate easier clearances. It speeds up the process although there’s the risk of some environmental clearances being given without due consideration just to stick to the timetable. So, there are downsides and upsides to almost every intervention. But there is no doubt that a good successful effort is being made in making government processes available to the public, in making sure that the public is able to participate in those processes, and in making government interventions as painless as possible.
Shruti Rajagopalan: Streamlined laws are better than non-streamlined laws. But let’s take labour law consolidation. There was a big fuss made by the government that it is going to streamline labour laws, and it’s going to be easier to hire and fire labour. Many different laws were streamlined into four, but there was no real change in the content of the labour laws themselves. Are firms better off when they need to look in four places for all the relevant rules as opposed to in 30 different places? Absolutely. But that’s not the only cost that a firm faces. The real problem is the way labour relations are controlled in India. The country makes it so costly to hire labour that firms simply don’t want to hire labour. We’ve either pushed hiring of labour to middlemen or into the informal market. Or we have pushed systems towards more capital-intensive rather than labour-intensive industry. My fear with the talk of streamlining and digitisation is that the effective control that the government has on private people contracting with each other is just too high.
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Second, even in all the streamlining, we end up criminalising most civil offences and we don’t have the state capacity to enforce these criminal penalties. So, what happens is you get a very discretionary state. There are going to be some very over-enthusiastic or politically opportunistic bureaucrats who are going to come down on some individuals with the full weight of the rulebook. And in most cases, non-enforcement or just looking the other way is the norm. Neither of those things bodes well for any sensible economic regime, which requires certainty and predictability. I don’t think this Budget has paid enough attention to that problem. So, while streamlining and digitisation are great, we need a moment like 1991, with a complete dismantling of government regulation.
How do you see the government’s approach towards cryptocurrencies in the Budget and the introduction of the digital rupee?
Sanjeev Ahluwalia: People are making vast amounts of money out of cryptocurrencies, so the government wants a share of it. The lure of raising more revenue has forced the government to recognise that crypto exists. I think it’s a good thing for the government to have recognised a phenomenon that already exists, and try and tax it because it should be taxed, and hopefully the government will try and mainstream it. Digital currency is simply an efficiency-enhancing mechanism, where you reduce the cost of hard cash management and circulation and gradually shift towards settling payments digitally.
What does the budget offer the common man?
Shruti Rajagopalan: I think in the process of making crypto income taxable, the government has let the cat out of the bag that it no longer intends to ban it. So, to that extent, this is a welcome move. My take has always been that, if it understands the underlying mechanism of blockchain technology, it would understand that it can’t be banned. So, you’d rather keep it integrated with the rest of the economy so that everyone can gain from it instead of driving it underground. Second, the government has capitalised on this moment to raise some tax revenue but I still think it needs to have some underlying policy framework for how it thinks about crypto because the original reason it wanted to ban crypto was that it’s too volatile. So, you have to choose: is it too volatile, in which case you have to carefully think about allowing losses to be carried forward along with taxing income, or do you want to capitalise on the profits? Either way, the policy has to be coherent.
And regarding the digital rupee, I don’t see it as competing with other cryptocurrencies, in the sense of it being completely decentralised and no one individual or entity being able to control or increase the money supply. But I do think that if the government doesn’t have a coherent policy on the rest of the crypto market, that will kill the digital rupee before it’s born because nobody is going to invest in just the digital rupee without a really thick crypto market which has a large number of buyers and sellers.
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Last, it doesn't look like the Indian digital rupee is going to be the global standard in the crypto market. If India wants to prevent other countries like China from becoming dominant in that market, it should allow a very thick and vibrant crypto market with a lot of other cryptocurrencies which are not controlled by the government.
What do you think of the Finance Minister’s comment that public expenditure will “crowd in” rather than “crowd out” private investment? Also, what do you make of the Budget’s emphasis on Atmanirbhar Bharat?
Sanjeev Ahluwalia: We are never sure of our domestic competitiveness and wary of the fact that our markets could be taken over by overseas competitors. So, while Atmanirbhar in its essence is meant to be self-reliance, a great deal of it right now is really just providing domestic protection as an incentive to investors who may want to shift their production processes from other locations in the world to India. So, Atmanirbhar is not really something that is seeking to enhance competitiveness, which is really the best way of becoming a resilient economy. It’s seeking more to provide the nascent industry argument that we need to protect domestic industry and protect MSMEs, which have been doing badly during the pandemic. I hope that once we get into more normal times, these domestic protection measures will be withdrawn gradually and we will open industry out to more competition.
Regarding public investment crowding-in private investment, as a statement it sounds fine. Of course, if public investment was to produce better infrastructure and long gestation projects, that would be wonderful for the private sector. But if public investment is going to try and substitute for private goods production, then I don’t think we have the firepower for it. It would mean that we would, in the short term, be crowding out the private sector because we would be borrowing. Public schemes to de-risk private investments are more interesting.
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Shruti Rajagopalan: Atmanirbhar Bharat is protectionist. I don’t think it’s conducive to growth at all. A good growth statement would have been announcing a commitment to slowly reducing tariffs year after year and then reaching a particular target. The Modi government with the Atmanirbhar slogan and the ‘Make in India’ slogan is more protectionist than ever before. Plus, tariffs on capital goods basically increase the cost of everything else that’s produced in the economy.
On your second issue of crowding out or crowding in, I have two points there. One, I think investments in health and education have been completely missing in this Budget. In fact, the outlays have actually reduced but those are the kinds of investments in standard public goods that have a long-run effect of crowding in other private investment. I think infrastructure investment is not the worst thing, but I don’t see the multiplier of attracting private investment to be that high. There is a second issue to consider. When the government is not able to raise enough revenue, and it commits to borrowing, it is in fact crowding out the private sector’s ability to cheaply borrow in the market. So, if you think of gross fixed capital investment as a whole, gross fixed private capital investment is just going to drop.
Shruti Rajagopalan is an economist at the Mercatus Center at George Mason University; Sanjeev Ahluwalia is an adviser at the Observer Research Foundation
