View: Why next month may be the most important for India’s economy

Her third budget got Nirmala Sitharaman the kind of raving newspaper headlines and roaring stock market approval all finance ministers want, although few admit to actually wanting it. Much of the praise is well-deserved. Columnists in these pages have explained why.

Unless there are nasty surprises in the fine print no one has caught as yet, the afterglow of a budget that broke free from NDA 2’s fiscal overcautiousness should last most of February. Obviously, then comes March — but what may not be obvious is why March 2021 is an incomparably more crucial post-budget month than any others in recent times. GoI doesn’t have the luxury of fleshing out this budget’s key proposals at the usual sarkari speed.

Well Begun is Half Done

Confidence among consumers, businesses, financial firms may be spreading wider. But it is still shallow. And it can evaporate after one or two adverse events, even if these have nothing to do with GoI actions.

Therefore, as the next financial year starts in April, GoI must be ready with its key budget measures. If all stakeholders know that the best bits of a good budget are good and ready to be implemented as FY2022 begins, it will shore up confidence no end.

Also, and equally importantly, clear evidence that GoI has sweated the details of its key proposals and is ready to operationalise them will have a multiplier effect on confidence even if there’s no major bad news. We rarely see a battle-ready, post-budget GoI as a new fiscal year begins. The very fact of 2021-22 starting with this big positive will deepen and widen the shallow pool of confidence.

So what are the best bits of a good budget that need to be worked on at warp speed? There are four.


DFI: Development finance institutions (DFIs) haven’t done the job earlier. There’s understandable scepticism about the new DFI. GoI’s Rs 20,000 crore seed capital by itself won’t do the trick unless the new body is staffed with quality people, who get a clear mandate and a clear undertaking that there will be no micromanagement. If that’s done — a big if — and done quickly — a bigger if — the new DFI can get down to business in earnest in the early part of FY2022, sourcing long-term capital and getting credit lines going. The impact of a well-designed DFI on both investment and investor mood will be huge.


ARC/AMC for banks: Why a bad bank, the popular name for the role the asset reconstruction and asset management companies will perform, took so long is a puzzle. But now that it is here, it should be up and running long before post-forbearance bad news on bad loans start flooding in. Otherwise, this single piece of bad news can sour the mood, allbut-freeze bank credit and have domino effects down the line.

Media reports suggest GoI is mulling banks owning or part-owning the ARC/AMC. Some pundits have already wondered whether there’s conflict of interest in this. There are details of funding to be sorted out, as well as an incentive structure. Plus, like in the case of the new DFI, the bad bank too needs quality people. That’s a long list. But if GoI can crack this and the ARC/AMC is functional early in FY2022, confidence among banks to lend and confidence in bank creditwill rise dramatically.


It’s a Gaol! No Longer

Privatisation: GoI trying to privatise is like India’s soccer team trying to qualify for the World Cup — the intent is all there, but we seem no closer to the desired outcome. True, BPCL perhaps fell victim to Covid. But Air India is still a sarkari airline because the sarkar took very long to get real. This budget promises to start small and then go big — a good strategy.

But even that will require quick identification of State units, including State owned banks, and a clear understanding of what’s a good price post-sale. With privatisation, the key thing to remember is that the best price is the one that the market can bear, not the price a committee of secretaries thinks is fair. Two or three quick privatisations of smaller State units will cheer investors no end, just for the sheer novelty of it, and whet the appetite for bigger public assets.

Spending programme: This has become a cliché. After every budget, pundits advise that spending programmes should be carefully designed and quickly implemented — and with a few exceptions, this doesn’t really happen. But this year needs a smartly designed spending programme to get off the ground quickly because GoI cash will be the first and biggest driver of sustained recovery.

Aside of spends on highways, which tend to get absorbed relatively fast, the bang for buck for GoI expenditure can be quite muted. That has to change, whether it’s new health projects or other asset-creation programmes. The big hike in allocations won’t mean much if months pass getting the cash into the broader economy.

If next month sees serious action on all four key measures, FY2022 will begin with exactly the kind of solid optimism that India needs.

The budget speech was in February. The real budget will be in March.


Views expressed are author’s own