As India awaits the Budget for 2021, there are a plethora of issues that need to be addressed. In this article, the author aims to discuss three issues which are of utmost importance: the rising non-performing assets (NPAs), declining aggregate demand which needs an increase in fiscal deficit in the post-Covid world and reviving jobs.
The Indian economy was already suffering from an economic slowdown before it was further slashed by Covid-19 and the lockdown. According to the National Statistics Office (NSO), the economy is expected to contract by 7.7% for the current fiscal year. The following offers an insight into some of the problems the Indian economy is facing right now, and possible solutions.
Set up Bad Banks-
The Covid-19 hit in 2020 is expected to boom the ill banking sector of India. The S&P Global Ratings predict that the NPAs might shoot up to 11% by FY22. The Financial Stability Report released by the RBI in July 2020 points that under severe impacts of Covid-19, the gross NPAs might jump to 12.5% by the end of the current fiscal. The situation is further amplified by the order of the Apex Court imposing moratorium for 6 months on the classification of loans as NPAs. This has led to the problem of hidden bad loans.
A way to fix this could be setting up a bad bank which could act as an aggregator of all stressed assets and work towards their resolution while banks can focus on business. It is suggested for the centre to use this as a policy option in Budget 2021. In fact, the President of Confederation of Indian Industries (CII) Uday Kotak has suggested the creation of multiple bad banks. In addition to this, the 4Rs, Recognition, Recapitalization, Resolution, and Reform, suggested by the Economic Survey of 2015-16 are still relevant today. This would include infusions of equity and selling of stressed assets in the corporate sector. Further reforms in banking could be bringing down government stake in public sector banks below 50% or privatizing a few on a test basis, as advocated by Raghuram Rajan.
Increasing Fiscal Deficit-
Growing Fiscal Deficit is yet another problem for the government to handle. The combined fiscal deficit of the state and the centre stood at 7% of GDP in FY20 and it is expected to be doubled and cross 13% for the current year. A recent government data shows that the demand for NREGA jobs has increased in rural areas as a result of 20 million workers returning to their home after lockdown.
India has been going through a downward spiral for the past five years, the first time since independence, this can be checked only through fiscal injection and thus higher fiscal deficits are desirable at the moment. Furthermore, a Brookings study on ‘The impact of COVID-19 on global extreme poverty’ shows that the biggest impact and increase in extreme poverty will be felt in India. A major chunk of these problems are caused due to a decline in aggregate demand.
These issues must be addressed by the budget by increasing the fiscal deficit in line with the Keynesian school of thought. Moreover, deficit spending creates a secondary benefit of causing a multiplier effect, an increase in proportional amounts to the spending. The Fiscal Responsibility and Budget Management Act (FRBM Act), 2003 would permit cutting non-essential expenditure and increase the fiscal deficit. The CII has also suggested to increase the fiscal deficit and start fiscal management from FY22 of bringing down the deficit to 3-4% in 3 years.
How to increase employment-
Reviving jobs, again a problem existing in pre-covid times and amplified by Covid is one of the major considerations for Budget 21. Therefore, there should be a focus on job-oriented sectors like infrastructure and real estates. Increase in the pace of infrastructure buildout will create jobs through construction and other economic activities. Abhijit Banerjee believes that one way to do this would be to revitalize public-private partnerships by appointing regulators with independence, funding, expertise and power.
Furthermore, Small and Medium Enterprises (SMEs) like textile industries are generally small but contribute to exports. These SMEs are seldom able to compete with global supply chains. They must be backed by improving credit access and relaxing or improving GST. Anil Bhardwaj has argued that a bond market for SMEs loans must be developed to bring down the cost of finance and create a supply-demand mismatch to positively impact lending. Along with access to loan, access is equally important. Currently only 0.2% of MSMEs export 40% of merchandise, thus support must be extended to MSMEs.
Apart from these, the budget must address the healthcare problem (effective primary healthcare care centres), the education sector, climate change and most importantly ensure participation from different strata of society including women and minorities.
Prakhar Raghuvanshi is a third year student of Law at National Law University, Jodhpur. He has keen interest in Constitutional Law, Philosophy and Economics.
Edited by: Nidhi
Disclaimer: The opinions expressed in this publication are those of the author. They do not purport to reflect the opinions or views of The Jamia Review or its members.