Game changers in the Budget

LIABILITY TO ASSET: “If, through the sovereign gold bonds proposed in the Budget, the government can generate gold stock as buffer stock, India can aggregate its demand for gold.” Picture shows people on the eve of ‘Akshaya Tritiya’ in Bengaluru. Photo: K. Murali Kumar   | Photo Credit: K_Murali Kumar

Even ignoring the reporting in sections of financial media which have reduced the Budget into mere ‘comics,’ the media debates on budgets increasingly make it difficult to separate the wheat from the chaff. Anyone who attentively heard the extensive TV debates on the 2015-16 budget and read the diverse opinions in dozens of newspapers would have been bewildered about constitutes the core thrust of the Budget. The media has headlined the Budget as ‘super budget,’ ‘full of big bangs,’ ‘prepped for take-off.’ This positive branding not withstanding, the question to ask is whether the first full-fledged budget presented by the Narendra Modi government has any game-changing potential. The answer is ‘yes,’ but the realisation of this potential will depend on how well the game changers are executed.

Paradigm shift

There is an unseen paradigm shift in this Budget. For the first time, an Indian government’s budget seems to focus on national effort as the core impetus for national development. This is not surprising as the Cabinet resolution on NITI Aayog directs the national policymaking body “most importantly” to “adhere to the tenet that while incorporating positive influences from the world, no single model can be transplanted from outside into the Indian scenario. We need to find our own strategy for growth.” Almost a decade back, Finance Ministers and Central Bank Governors of the G20 nations had declared that “there is no uniform development approach that fits all countries” and “each country should choose the development approaches and policies that suit its specific characteristics.” Three years later, the World Bank conceded “we have learned the hard way that there is no one model that fits all.” Yet, for a decade more, India followed the economic model of the West till the NITI Aayog decided to correct the course. The game-changing elements in this Budget are in line with NITI Aayog’s philosophy.

The first expression of the India-centric approach is the innovative agenda to ‘fund the unfunded’ 58 million micro and small businesses in the non-formal sector. This sector, according to the Credit Suisse Asia Pacific/India Equity Research report of July 2013, is unique to India. While in other countries the informal sector is largely illegal, in India, the report says, it is non-formal because government policies have not reached it. These 58 million non-formal micro businesses generate millions of rural and semi-urban entrepreneurs and provide 128 million jobs. Two-thirds of these units are operated by Scheduled Castes, Scheduled Tribes and Other Backward Classes. Yet, this Kamadhenu of job creation gets only 4 per cent of its credit needs from banks. The sector now borrows at usurious rates of interest of 120 per cent and beyond. While it is denied funds, the formal sector — which garnered some Rs.54 lakh crore since 1991 by way of foreign and domestic capital and loans — has added just a couple of million jobs in two decades. All governments since liberalisation had expected these millions of units to die of euthanasia in market economics. But they have posted the fastest growth among all segments of the Indian economy. But economic policymaking in India continued to ignore them. Mr. Modi is the first political leader to see the potential of this sector to drive up jobs. He also realised that the modern banking system is unsuited to fund this sector. In the last budget, the Modi government had announced a committee to structure a new financial architecture for this sector. The Reserve Bank of India reportedly opposed any new architecture. But this Budget has gone ahead and announced a new financial architecture, the Micro Units Development Refinance Agency (MUDRA), for the non-formal sector with a corpus of Rs.20,000 crore and budgetary support of Rs.3,000 crore for credit guarantee. MUDRA will come into existence by a separate law. This will fund the millions of entrepreneurs by an innovative financial architecture that will integrate the existing private financiers of small businesses as last-mile lenders. It is a completely indigenous, India-centric and innovative solution for the most job-intensive, yet totally credit-starved, segment of an economy unique to India.

Monetisation of gold

The second potential game changer is the beginning of the process of monetisation of gold — creating and circulating money based on gold. Modern economists would dismiss gold as a wasteful item; as a “relic of barbarism.” This might be the case in the U.S., which successfully proscribed private gold in the 1930s, made possession of gold an offence and turned it into a government asset. But Indians celebrate gold and the Indian government, unable to do what the U.S. did, has always been bewildered about how to handle this asset. The Budget policy to monetise the domestic gold stock is an Indian solution to a unique Indian economic phenomenon. Obviously, no Western idea can handle it. If, through the sovereign gold bonds proposed in the Budget, the government can generate a substantial gold stock as buffer stock, India can aggregate its demand for gold and use that power in the international market. If it builds a decent buffer stock, it can play the global gold market which, barring China perhaps, no other country can, because only in India private gold consumption is as high as a fourth of the world’s. Despite that, India has no gold refining and standardisation infrastructure. This new policy will help build this. The only concern is that unless full tax immunity is granted to gold to be lodged in bonds, the entire stock of black gold may not enter monetisation.

The next big idea is accident insurance for Rs.2 lakh at Rs.12 per annum; for life insurance at a premium of Rs.330 per annum and lifelong pension on an annual premium of up to Rs.1,000, each to be contributed by the beneficiary and the government equally. This ambitious plan aims to reach crores of poor Indians.

Scaling up execution

Each one of them is a potential game changer. But their success requires scaling up of execution. The MUDRA idea requires millions of private financial intermediaries, who are currently providing finance to non-formal businesses, to be registered and integrated into the new architecture as the last mile delivery instrumentalities. The insurance and pension idea also needs mobilisation of crores of beneficiaries into the network. The idea of gold monetisation also calls for a massive campaign to convince the millions of Indians possessing gold to look at gold bonds as equal to gold itself. These are great ideas but their success will need scaling up of the kind which Mr. Modi demonstrated when he got over 12.5 crore Indians hooked to the banking system through the Jan Dhan Yojana [JDY]. The RBI was reportedly not very enthusiastic, if not optimistic, about such extensive banking extension. But Mr. Modi reportedly insisted on 7.5 crore bank accounts and in less than six months. He could scale up the very execution mechanism of PSU banks, written off by elite Indians as inefficient, to achieve not just 7.5 crore accounts but 5 crore more.

Reaching and financially formalising crores of people was thought of as impossible till Mr. Modi could insist on and drive the JDY to a huge success. His high scale of success lends credibility to the massive reaches of human numbers proposed in the MUDRA, Pension and Sovereign Gold Bond schemes. With Aadhar cards and JDY accounts, the huge scale of operation assumed in the game-changing ideas in the budget do not seem over optimistic. If Mr. Modi succeeds in delivering credit through the MUDRA model to millions of non-formal units, he would do in India what Deng Xiaoping did to China through the 28 million Town and Village Enterprises. If Mr. Modi gets several crores of Indians hooked to the insurance and pension schemes, he could improve their life beyond recognition. If he brings hidden gold into national coffers through the sovereign gold bond scheme, he could transform gold from being a liability of India to its global asset.

Mr. Modi’s proven capacity to scale up the government to his level of ambition makes the game changing ideas in the Budget possible.

(S. Gurumurthy is a political and economic commentator.)

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Printable version | Apr 14, 2021 7:48:06 AM |

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