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Budget 2020: Unless govt is firm about its basic economic ideology, it will continue to make ad-hoc, ill-planned changes in name of policy

Rudra Sensarma

Finance Minister Nirmala Sitharaman has a crisis on her hands. On 1 February, we will know if she is going to waste it or use it to create a transformative moment in India’s economic story. Some of her policies in the last six months have met with limited success. The government has been spending money on social sector schemes but consumption is subdued. It invested heavily in infrastructure but supply bottlenecks refuse to ease. Sitharaman cut corporate taxes but private investments have not picked up. She asked banks to pass on Reserve Bank of India's (RBI) rate cuts and made the right noises on fiscal prudence but interest rates refused to play ball. Perhaps there are more things that she should be doing and experts have offered many suggestions. But I fear none of these will work unless the government makes up its mind about its basic economic ideology.

Given that fiscal profligacy will give us nothing but higher interest obligations and inflation, we have only two options: Either fund higher public expenditure through an increase in taxes (libertarianism) or cut taxes along with spending (conservatism). The choice requires the government to introspect and articulate its economic ideology first.

If the guiding economic principle is liberatarianism, then admit that the government will have to tax more, simply because it intends to spend more. And identify the key sectors that are job generators and growth drivers. Then try to spend your way out of the crisis by harnessing multiplier effects and crowding-in private investments. On the other hand, if the ideology is conservative, the government must make it clear that from now on it will tax less, spend less and let the private sector drive the economy. Accept that the markets are supreme and the government is an inefficient provider of all goods and services. Withdraw from all businesses except those that are public goods or in the nature of strategic activities. There is enough idle cash and liquidity in the system and such a strong signal from the government will kickstart the spending and growth cycle.

Representational image. Reuters.

Representational image. Reuters.

Committing to one of these economic ideologies will provide clarity to industry and investors on what to expect from the government. All ministries and departments would have to fall in line with the guiding principles. They will stop tinkering with the economy through ad-hoc and often ill-planned circulars in the name of policy changes. Internal consistency will bring regulatory stability and that will solve one of the main problems we are facing right now which is regulatory uncertainty. We see too many policy changes that are often unforeseen and sometimes appear contradictory or unreasonable.

Consumers, businesses and investors want stability so that they can plan ahead. Economic decisions of individuals and businesses do not always depend on the current situation but what is likely to be the rules of the game—months or years later. The government can provide assurance and confidence by laying out its economic philosophy and then take as many measures as it wants in alignment with the broad principles.

Let me make a few suggestions for the 2020 Union Budget to boost growth and employment without burdening the fisc (and my favoured economic ideology would become obvious).

(The writer is professor of Economics and Dean (Research, Innovation and Internationalization), at the Indian Institute of Management, Kozhikode)

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