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When Micro overwhelms Macro

India, as a poly-systemic economic entity, faces a unique cusp of problem and opportunity. Governance response in the Union Budget for 2021-22 remains firmly rooted in supply side measures.

Problems in the near term are due to obvious aspects of Covid’s depressive fallout, a distinct geopolitical shift in its littoral leading to renewed vigour in defence driven expenditure, lameness in tackling social unrest by India’s notorious rent seekers including its wealthier farmers and the net result of all of this in lowered fiscal flexibility and ballooning deficit.

Opportunities stem from a mild to deep suspicion amidst global consumer economies in the west as well as pre-industrialised third world economies about the Chinese Middle Kingdom’s long term geo-political intent. This suspicion has catalysed moves by many developed economies to diversify their supply chains away from China. They are also rooted in an unfulfilled set of rising aspirations of India’s inertially expanding middle classes, both urban and rural, as well as unfulfilled demand for skills, healthcare, and infrastructure that support fulfilment of those aspirations.

How does the budget presented today by Honourable Nirmala Sitharaman, Vitta Mantri of the Union of India square up to these problems and challenges?

At the outset, let us be clear. 9.5% fiscal deficit for the coming year outlined in the budget was both inevitable and necessary to measure up to the immediacy of problems outlined above. It was also equally inevitable that this would be met by a mix of long- and short-term borrowings from local and multilateral institutions.

Given heightened levels of educated, skilled as well as unskilled unemployment, it was also going to be difficult if not untenable to politically defend any meaningful axing of social expenditure schemes, particularly considering multiple polls bound states in the next year or so. Most significantly West Bengal and Maharashtra, the third and second largest States in the Union and some measures announced in the budget can be traced to these electoral necessities.

That said, on the macro front, the following will remain an unfinished agenda for the government. It is well understood that while 65% of Indian votes live in what are now urbanized areas, 70% of Lok Sabha and local assembly constituencies remain classified as rural.

Before one implements obvious re-allocation of resources away from subsidising failing agricultural policies of the past to sustainable infrastructure development necessary for industrialisation and higher life quality, one needs to gerrymander the electoral districts to reflect the new urbanized reality of India. Till then, policy will be dictated by politics of appeasing perceived voter base, i.e., Largely rural. The over hyped love for the farmer is one crudely equivocal consequence of such politics and their policy consequences. Useless fertiliser subsidies and ridiculous minimum support prices which stockpile rotting grain will therefore continue of necessity borne from expediency.

Instead of claiming advertising success through distribution of tight resources in small quanta across a bewilderingly large array of central ‘yojanas’, truly federated implementation of fewer, more impactful, central subject related schemes would both rationalise resources and create greater real impact through scale and scope. Advertising resulting successes would require far lesser effort.

Let us not gainsay that subject matter experts and specialists have remained in short supply in preference to generalists among India’s civil servants, i.e., people who would implement said schemes or Yojanas. Given state level envy of central resources, duplication of schemes may continue as norm, not necessarily in terms of benefits reaching the intended target. This budget does not recognise such limitations of implementation.

The other and most significant macro one would have liked is a rebalancing of economic forces in favour of consumption. Consumption has two engines. Public projects, such as infrastructure etc. This government is not short on it. More than Rs 12 lakh crore has been allocated under various heads to such projects. The other wheel in this caddy which is directly connected to the flywheel of multiplier effect, is mass consumption. Higher the multiplier effect and higher the velocity of money circulation, the faster a sluggish economy pulls out of recessionary apathy.

This budget pays political lip service to mass consumption by failing to recognise anything on India’s mass consumption story beyond politically correct “affordable housing”. GST rationalisation is welcome, but it is time to recognise this government will not switch from income to Tobin tax on transaction or exercise fiscal prudence especially when it comes to putting money directly in the hands of consumers. It is at least maintained a consistent track record in this regard. Ongoing digitisation of various aspects of tax assessment and reduction of human discretion and punitive action is also a much-needed sigh of freedom for both enterprises and business needs.

One out of two on consumption drivers is not bad but could be bettered dramatically with a direct focus on mass consumption. E.g., Diverting just 40% of topsoil ravaging NPK fertiliser subsidy (Rs 30,000 crore) + 25% of MSP support (Rs 62,500 crore) to direct benefit based, mass-consumption incentives would have a 6x multiplier effect, adding Rupees Five & half lakh crore, or 2.5% addition to India’s GDP.

The budget has delivered no negative surprises however, from overall taxation or policy perspective vis a vis last year, which underline the ongoing confidence in corporate India expressed in modest stock market gains.

On the investment front, while incentives to investors ranging from mutual funds to AIFs to high-net-worth individuals offered via GIFT city registration or location are individually all welcome, it is not clear why one needs to be based in any specific city to receive them, apart from exigencies of political commitment. India has the opportunity to create 29 such locations, one in each of its states. Widespread investment and public savings scheme related incentives should go a long way in reducing geographical concentration of wealth and wider participation or inclusion.

These are all however quibbles which require deeper introspection and weaning governance away from supply towards demand enablement policies.

Supply side policies, by definition, require a vast number of micro interventions, intensive bureaucratic action, and carefully nuanced navigation of local political interests for sustained success. There is however no definitive evidence in economic literature of the inevitability of “supply creating its own demand” as Ronald Reagan so fondly declared. That said, one’s initial estimation of expenditure shows a definitive trend in all departments of governance to move towards productive capital asset formation. That is indeed a welcome sign.

Till what is more obvious from study and practice to professional investors and practicing, market economists, i.e., ‘demand side growth policies have longer term, more sustainable impact in poverty alleviation, equitable wealth distribution and creation of a stronger growth engine’; is fully appreciated by India’s policymakers, this budget of many interesting and some truly useful micro nods to supply side issues is the best money can buy.

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