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Issue 7

Decoding the Union Budget 2021: Q&A with Professor Nishant Chadha

As Nirmala Sitharaman presented the Union Budget on 1st February 2021, setting India forward on the road to economic recovery, the writers of OpenAxis sat down with Professor Nishant Chadha to better understand the nuances of the Budget and its implications.

Q: There are a lot of worries about the Fiscal deficit for this financial year. Could you tell us the concerns around it and how the government plans to fund it? 

A: Very loosely put, the fiscal deficit is the difference between the government’s expenditure and its receipts. The concern that surrounds it is how do you fill up the gap between your spendings and receipts? Or if you borrow today, how do you repay it tomorrow, and will you have enough to repay it? 

And if we don’t borrow today, then how will we finance what we want to do? That is the same decision that any business or economic entity faces. Your borrowings are contingent on your belief that you can generate more income and pay off the debt later. Granted your activities are productive enough to cover the costs of borrowing. It’s the same logic that works for the government, but it can get a lot more complicated sometimes. 

The fiscal deficit is higher owing to the huge shock to the economy last year that resulted in low receipts and businesses shutting down.. So, where does the government get its revenue from? Now, since the government does not do any productive activity (like run businesses or earn profits from them), it essentially taxes other productive work, its citizens, businesses, etc. That is how it raises its revenue. Now, when you have an economic shock, especially one as large as the COVID-19 pandemic, your productive activity slows down as businesses aren’t creating much since they are not profitable. So, their tax revenues, which are the proportion of what they produce go down.

So that’s the reason why you have a higher fiscal deficit. Now, the question about concern is really about how optimistic we are about our future and about our ability to meet the government’s increased debt burdens. 

So the last part of the question you asked was how do you finance the fiscal deficit. One way is to disinvest. So you have wealth which you sell off and use the assets to finance expenditure.

The second way is that you go to people and borrow. So that’s the debt market. Typically, that’s the way the government fills the gap.

And the third way is by monetizing the fiscal deficit, which is essentially printing money. This is done by the RBI buying the government bonds and printing more money against that. So, it’s essentially just increasing the money supply. 

Q: Could you tell us something about the expenditure for the agriculture sector. A lot of reports mention that there isn’t a lot being done for the farmers, even against the backdrop of the protests. Can we observe an emerging pattern of inequality here? 

A: Yeah, I have an unpopular view about this. I think the only thing the government or the society can do for the farmers, is to ensure that we have fewer farmers. That is the only way out. 

So I think that agriculture adds about 14-15% to our GDP and employs about 45-48% of the people. That is where you have inequality. At the upper end, you have people who are in productive sectors like services but on the lower hand, people are tied to agriculture.

Increase in productivity with so many farmers is bad for the farmers, it is good for the consumers. So the only thing the government can do is, therefore, focus on moving people away from farming into value-added activities. Typically it would involve people moving to cities and into manufacturing or services. Our problem has been that we don’t have a manufacturing sector, so we have been unable to implement this transition. And it is a very difficult transition as services typically require the kind of skills and human capital that people in rural India don’t have. So now what happens? This is a structural feature and the government has two choices: either people’s income increases itself so that they are no longer poor and reliant on you or if they remain poor, you will have to pay to support them. And that is the essence of this distinction between growth and inequality discussion.

If you don’t do anything in terms of investing in people, if the skills don’t improve, if they don’t engage with other jobs, there’s nothing you can do. None of them are leaving agriculture or moving away from social security schemes. So where do you bring the money from? So to me, this expenditure needs to be balanced. This choice needs to be made. And the only way to have to be able to manage this is to invest in growth.

Q: So does the government have to invest in education training or similar programs to encourage having fewer farmers in the agriculture industry to increase labour productivity?  

A: See that is unfair. We all blame the government, but it is a difficult job to do. As I said, the government doesn’t engage in productive activities, but what it can do is enable the right kind of environment to generate productive activity. The bottom line is that businesses need to grow.

We need more of the right kinds of businesses and entrepreneurs, and more formality in our labour markets. The government’s job is to worry about why jobs are not being created. Now what they can do to resolve this is to encourage entrepreneurship and increased business activity so that people can start or grow businesses and hire more people. 

Now, what is the challenge here? Consider how in a lot of banks that you deal with, look at what has happened with the call centres. They’ve all been replaced by chatbots. Call centres are not really skilled jobs. You just have to talk to people. But they were a huge boost to India in some sense, because they moved a lot of people out of lower-middle-class backgrounds into a sort of middle class, but now they’ll all go away. Just like how mobile phones ran out the STD booths. This is a reality that we are going to run into very soon. So what should the government do now? Well, at the micro-level, they should essentially invest people with enough skills and create an environment which encourages business activity. 

So when we think about what the government can do in terms of job creation, I think over the long term, we need to be cognizant of the fact that by its own admission, this government is spending huge amounts of political capital on digitization but aren’t spending anything on creating it. The question is who will work in those areas? So if I look at the education of the labour force today in India, 28 to 30% or one-third of our labour force is illiterate. We don’t have the labour composition that can be a part of this economy that we are talking about. For example, mobile phone penetration in India is high, but only in absolute numbers. So it is a huge market for people. However, the government’s job is not to create huge markets, but to figure out what is happening to those people who don’t have mobile phones. How will they survive? 

The digital divide in this country is huge. So, what technology 4.0 we are talking about? We don’t even have automation of the basic kind right now. Most businesses in this country don’t have computers. We really need to understand the reality in which we exist.

We have this challenge in the long-term that we need to start acknowledging and addressing now, and then you hope that there is enough creativity and innovativeness in your country’s population, which will take care of itself. And I believe there is. The government’s job is just to create and keep creating the right environment and then hope for the best. 

There are things that they do in terms of job creation, for example, investing in infrastructure will create jobs, but they’ll create construction jobs. The whole world is moving towards, you know, having AI, ML and robots in construction and moving people away to more productive work. We are trying to create jobs where we have people moving from agriculture to construction. This is okay for now, but is this really what we want for the future? These are some hard questions that we need to answer.

Q: We also wanted to ask you about your expectations from the budget and whether or not they were met? 

A: Honestly, I think this is a fair budget and I’m quite okay with it. 

One of the things that I do like about the budget is asset monetization. There’s a lot of land that is lying around, which is not the government’s job to hold anyway. So, releasing productive assets and transferring them to other people in the economy who can use it better is a great idea. I would also like the Indian government to have a national social infrastructure pipeline at some point. 

And I really would like them to have a plan, (like the one that they have for capital expenditure they’re making on infrastructure, for example; in which they give a plan for three, five or 10 years) for education and health. I think now is the time to make commitments. India needs to start thinking about how they’re going to tackle this problem of a low level of education and skilling and increasing enrollment ratios in secondary education.

There is all this discussion around technology 4.0, but how are we going to do it? Our kids don’t even finish school. So what are they going to do? They just want to use YouTube. They become a market for others. Agreed, the mobile phone penetration is high in India, but that just increases the size of the market for somebody else, because the technology is not in the hands of producers or entrepreneurs, that technology is in the hands of consumers. So yes, we’re consuming technology a lot, but what are we doing with it? Or we are basically giving a huge market to Google and Facebook and YouTube.

And yes, we can replace TikTok with Tik Kik and PUBG with FAU-G. But that is not what we need to do. If you want to harness this technology, you need to turn these to as many people as possible, especially to producers and entrepreneurs.

We really need to have a plan for education and health, just like we do for other forms of investment because human capital is a form of investment, not expenditure. We really need to get our act together there.

Q: There’s a lot of information available about the budget. What would you recommend as a good, informative source for somebody who just wants to understand it? 

A: I would suggest that you just look at the budget documents, they are annotated along with footnotes explaining everything. You can just go to the website (www.indiabudget.gov.in).The best way to learn for yourself is to spend time on it and make your own judgments, that is what I would advise. 

Nishant Chadha is a Fellow and Head of Projects at the India Development Foundation, and a visiting associate professor of Economics at Ashoka University.

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