The second female finance minister of India after Indira Gandhi, Mrs. Nirmala Sitharaman, recently presented her maiden budget on 5th July 2019 at 11 am. The Union Budget is extremely significant as it aids in controlling the economic fluctuations of a nation. It attempts to ensure the proper handling of inflation and deflation to bring about economic stability in the country. The vision for this year’s budget can be summarized in the following points: to build physical and social infrastructure for digital platforms in every sector of the economy, enhance the Make In India campaign, with greater emphasis on MSME, start-ups, defence manufacturing, automobiles, electronics, fabs and batteries and medical devices among all sectors, good water management with clean rivers, Space and satellite programmes, self-sufficiency and export of food grains, pulses, fruits and vegetables, a healthy society with ample nourishment for women and children, enhancement of the sporting section and Team India, and awareness regarding sustainable and pollution free development of the Indian economy.
But before we can understand how the Union Budget is significant in helping the Indian nation we must first understand a little about the background of India with respect to its economy.
Background of the Indian economy
India has a population of 1.37 billion with a population growth of 1.1% per annum. In terms of purchasing power parity, it is the third largest economy in the world after China and USA. The nation gained its independence in 1947 and by 1950 the first government was formed at the Centre. At present, India is expected to have a growth rate of 7.5%. While India is growing at a fast rate, it still plays second fiddle to China. However, it is believed that by 2038, the Asian economies – India and China – will surpass the rest of the world and be larger than the OECD countries, thus putting an end to European domination.
This year’s budget is quite aligned with the nation’s aim and vision. The underlying objective of the budget is “Strong People for a Strong Country”. The Indian economy was at $2.7 trillion in 2018 and the aim is for the India to become a $5 trillion economy in the next 5 years. The way to do this would be through structural reforms. In the last five years there have been big reforms in the spheres of indirect taxation, bankruptcy and real estate. There were also the MUDRA loans which helped the common Indian man to conduct business and through varied programmes, the government provided for electrical connectivity in the house and the installation of toilets at home. The budget made many recommendations and showed sincere intent on part of the government to enhance the Indian nation.
India is the largest nation with respect to milk production and second largest in food grain cultivation. However, the nation is plagued with the problem of farmer suicides. This raises a pertinent question- has the Finance Ministry done enough to help farmers?
Our Finance Minister proposed a scheme to help villagers who depend on agriculture and traditional industries known as the Scheme of Fund for Upgradation and Regeneration of Traditional Industries (SFRUTI). The underlying the hope is that, through this scheme more Common Facility Centers (CFCs) would be set up which could facilitate cluster-based development, to make traditional industries more productive and capable of generating sustained employment. She also proposed to form 10,000 new farmer producer organizations to allow for improved economies of scale for farmers in the next five years.
This scheme may be beneficial in making the agriculture sector productive and enhance employment, but before that there needs to be some dialogue on the issue of non-repayment of farmer loans, which is the prime cause of farmer suicides. Farmers may have an outstanding loan of Rs 1 lakh but hold assets worth Rs 5–6 lakhs. Unfortunately, they are not aware of their land value due to inadequate land records which resultantly places farmers in tight situations as there is no proper effective ownership of the land. Also, increasing the number of farmers and farmer’s organizations is not the solution to this problem. There needs to be a conscious effort to increase productivity. India is fortunate to possess much better land than China, however the productivity of Indian farmers is one third of their Chinese counterparts. A reason for this could be the fragmentation of the land, which can be traced all the way back to the period when the zamindari system was practiced. For farming to be profitable, land area must increase. As of now, farm sizes are too small to be profitable. A greater amount of land can result in higher and better yield of crops. It is thus necessary to defragment land. Farmers could perhaps engage in contract farming thereby aggregating land, thus allowing for more yield.
The budget also spoke about the Agriculture Produce Marketing Cooperatives (APMC) which should enable farmers to get a fair price for their products. In addition to this, there was also the announcement of Zero Budgeting, but the main hurdle lies in getting it implemented. Even if production were to increase, consumption needs to catch up. Policies need to be modified. Doing more of the same thing is not the answer as the world is constantly changing, and policies should change to meet the changing world. There is a noticeable intelligence vacuum with respect to the quality of policies.
One creative way of helping farmers would be to look at the types of crops cultivated with respect to the water table. In India, we do not look at the water table as a factor affecting agriculture but rather we consider land. Water is an important unit, as some crops like paddy, require more water than others. It makes no sense growing water rich crops in arid regions. If there took place a restructuring of crop cultivation it could help farmers more, as they would be growing crops according to the climate conditions in their respective areas, and thus would reap higher yield and productivity. To understand the water table issue, satellite imaging could be of great help.
The budget has put forward an ambitious vision for India to become a $5 trillion economy. A viable way to do this would be through investment. However, for investment growth to occur, there must be access to low cost capital. India requires an average investment of Rs 20 lakh crore every year. To obtain this, a number of measures have been proposed by our Finance Minister- setting up a credit guarantee enhancement corporation, implementing action plans to deepen the market for long term bonds, and permitting investments made by FIIs/FPIs in debt securities issued by infrastructure debt funds, to be transferred to any domestic investor within the specified lock in period. These are measured and accordingly, investments are gained from the private sector.
The Indian economy is the third largest in terms of purchasing power parity, yet people are hesitant to invest in our country. This can be because of a limited faith in the macroeconomic policy of the nation. It is of vital importance to change the mindset of the people and encourage them to make financial investments instead of physical investments.
There must be an increase in personal savings by roughly 50% and these savings must be translated into financial investment. Until now, the norm has been that people save and invest in physical assets like gold, which has no returns. Large financial investment is needed to fix and improve the economy of the nation. The Indian infrastructure is seriously lacking as can be seen with the collapse of the Bombay airport, and the grave scarcity of water in Chennai.
If the infrastructure is significantly improved, the nation would indubitably witness better productivity. India has funds and is willing to utilize this money but incremental increases make no difference if the money is not used properly. It is much more important to improve or rather rethink the ways in which the money should be spent. We need to consider the infrastructure involved in order to bring about effective utilization of the money spent. This holds true for all sectors of the economy – education, defence, trade route protection etc. Innovation is the need of the hour, and with good digital infrastructure, better results can be attained with respect to investment. More money will not lead to results if there is no supporting infrastructure.
India can also make use of overseas borrowing to meet her infrastructure needs, instead of just relying on the public–private partnership investment. However, it must be borne in mind that overseas borrowing is a double-edged sword. On one hand there has till date been no capital call-out with respect to India. This means that India as a sovereign nation is not in trouble and therefore can engage and expand its overseas borrowing. However, India must be careful to not overshoot its borrowing capacity as in that case the country’s external debt would significantly increase. Borrowing something like $50 billion is feasible but anything above $1 trillion is not.
$5 trillion economy
If India desires to become a $5 trillion economy, certain things can be effectively done to set the ball rolling towards this goal. The first and foremost thing to do would be to fix a goal regarding the elimination of the primary deficits. As of now, India spends more than what it earns. There should be a balance of payments with spending being roughly equivalent to earning.
Secondly, improvement of the tax base and effecting compliance with taxes is imperative. This can be done if the public has faith in the government which in turn can only be achieved if the government were to limit wasteful spending, for instance, reduction in the size of government salary and pension.
The third thing to do would be to improve implementation procedures. India does not usually end up finishing its projects and tends to drag things through. Finishing and allowing for proper implementation would reduce additional costs in maintenance and limit other extraneous expenses. For instance, if there were proper implementation, we would not have witnessed the collapse of the Bombay Airport or Chennai’s water crisis.
The last way to achieve this goal would be to conceive more innovative ideas with respect to policy making. India is indeed going through an intelligence vacuum where the same ideas are constantly being repeated or schemes inspired by the West are being put into effect. Times have changed, and it is thus of vital importance to have a newer insight into matters and have ideas that are inherently Indian and suit the Indian psyche. One example of an innovative Indian idea is the UPI payment system. This proposal has revolutionized payment gateways in the country, allowing for large scale progress and pushing it towards the path of becoming a $5 trillion economy.
Picture Courtesy- Firstpost