Finance Minister Nirmala Sitharaman begins preparations for presenting her fourth Union Budget when Indian economy is on a revival path - GDP grew 8.4% in second quarter of FY2022, after expanding 20.1% in first quarter. So, what can she do to accelerate growth in the shadow of newer Covid variants?

Fortune India organised a Pre-Budget Roundtable of some of India's brightest economic minds to bounce off ideas for Budget 2022. The panel comprised Jayant Sinha, Member of Parliament, chairperson of the Parliamentary Standing Committee on Finance and former minister of state for finance and civil aviation; Subhash Chandra Garg, finance secretary from July 2017 to July 2019; Rajeev Gowda, chairman, Research Department & national spokesperson, All India Congress Committee, and former member of Parliament; Akhil Gupta, vice chairman, Bharti Enterprises; and Chetan Ahya, managing director, Morgan Stanley Research. The discussion was moderated by Rajeev Dubey, Editor-in-Chief, Fortune India. Edited excerpts:

What are your two-three biggest expectations from Budget 2022? What should be the priorities?

Jayant Sinha: We are getting ready for an excellent year for the economy. The Budget is expected to focus on three things. The first is strengthening public health infrastructure, ensuring we are ready for any variant of the virus, our population is vaccinated and we have infrastructure to take care of people in this pandemic. In the last Budget, there was a significant step-up in healthcare spending. I hope that is enhanced.

The second is support to vulnerable population. The prime minster has announced that the Pradhan Mantri Garib Kalyan Yojana providing free ration to nearly 80 crore people will continue till March. There are significant outlays for MGNREGA to support rural employment and Kisan Samman Nidhi to ensure healing of scars caused by the pandemic.

The third is public investment in the form of National Investment Pipeline (NIP). Decisions have been taken regarding National Bank for Infrastructure Development. We will be able to provide excellent debt financing for public investment. NIP is already providing significant equity for infrastructure projects.

With economy roaring back, we will see significant public investment. The PM announced in Glasgow that we will reach net zero carbon emissions by 2070. That means massive green transformation, particularly in infrastructure.

Rajeev Gowda: There is nothing to argue on priorities Jayant has specified. The issue is the difference between aspirations and reality. Over the last three years, more people have moved from cities to farms for jobs, resulting in tremendous demand for MGNREGA. This is opposite to what we wanted for the country. In the short term, we have to pay attention to social safety measures such as MGNREGA. The other point relates to small businesses disrupted by demonetisation and GST. Many sectors were hit in the pandemic. The Atmanirbhar Package involved borrowing more (by people) rather than giving cheques.

NIP has been announced in each of the last three Budgets, and sometimes between Budgets too. Maybe financing is still being worked out, but for many of us, it is more a pipedream than a pipeline. The other concern is putting more money in people's pockets. We have been seeing rising fuel taxes ever since Arun Jaitley lucked out on oil prices. The rise in inflation is hurting people's ability to trigger demand that will influence growth. Instead of V-shaped growth, we are seeing K-shaped growth, where some sectors are growing and others hurting terribly.

We want more government expenditure, and not just in infrastructure. This year, government final consumption expenditure is below 2019 levels. We also want government to stop squeezing taxes and cesses out of family budgets. That will make people spend.

Subhash Chandra Garg: Any government has three priorities in Budget-growth, redistribution and common goals such as environment and security. It has two instruments for these, fiscal policy and economic policy.

The government is going to emphasise on capital expenditure, which can take two routes-its own capex and that of public sector enterprises. There will be greater emphasis on both. The growth agenda will be serviced by more capex. In redistribution, the focus has been on providing things that make life better, including toilets, water, LPG and electricity. That agenda has been substantially serviced, but there is more to be done, so there will be further emphasis on that.

On redistribution, many schemes were designed to provide resources to the poor. This will increase as government is turning populist. It seems farmers, non-farm labourers and urban poor got a raw deal post-Covid. This Budget might give them something. On economic policy, there will be a little less emphasis on reforms, thanks to farmers' bills. The privatisation agenda has not moved much, so there will be lesser emphasis on that.

Akhil Gupta: We are coming out of a very high fiscal deficit. This year, the nation needs to stand strongly behind the finance minister and encourage her to not compromise on capital expenditure. When emphasis is on controlling fiscal deficit, the axe always falls on capital expenditure. The planned ₹102 lakh crore spending on infrastructure has not really materialised because of these pressures.

For continued infrastructure capital expenditure, the government, instead of lending or putting own money, should provide guarantees to financial institutions for the private sector which can be enforced till projects take off. This was recently done for MSMEs. It enabled many MSMEs to come out of the Covid situation.

On another front, there is no room for tax concessions. We need tax rationalisation. There is no reason why capital gains should be taxed at 10% and individuals with high salary at 42%. How can income generated by working 10-12 hours a day be of less consequence than money made in the stock market? The rates should be collapsed into one. It cannot happen in one go, though.

The third area where not much has been achieved is divestment of PSUs. With stock market at wonderful levels, why should government not be able to speed up divestment? The FM should be able to lay out a clear plan for 20-30 big PSUs.

Chetan Ahya: We looked at many Asian countries. They accelerated per capita income and GDP growth by becoming part of global economy by focusing on exports. This drives savings, giving you income to invest, and brings in a virtual growth cycle. We need a proper, long-term, export strategy for manufactured goods. The success in services is not enough. Any strategy for exports will be important. Exports, capex and, within that, infrastructure capex, are three focus areas of the government. That way we can grow faster and get per capita income to a reasonable level.

In China, government owned all land, and used it as equity to finance infrastructure. The Indian government has state-owned enterprises which should be used for funding infrastructure. There should be a clear strategy.

If we look back 18 months, has the stimulus worked? If yes, to what extent?

Gowda: What stimulus? There was a package with headline numbers. A recent report says 10% of that was spent. The actual value of the stimulus is much lower, and even there, only 10% was disbursed. While the world is following a Keynesian path, here, it has been an illusion. That is why you don't find any transformation that a stimulus should have resulted in.

Instead, people are moving back to farms and labour force participation has come down. Unemployment levels are over 8% in urban India, 7% in rural India. So, there is a huge problem. If the stimulus package was to turn things around, why is this happening?

We have not seen direct investments to make life better for small businesses. There have been some attempts, but we need more. A lot needs to be done to take care of the base of the pyramid and ensure that benefits of growth reach them too.

Garg: There are three components to the stimulus package. One, targeted at the poor and those who lost jobs, be it free ration to 80 crore people or money in accounts of poor (Jan Dhan) or PM Kisan. These transfers-in cash or kind-helped the poor through the pandemic and take care of income loss, though they did not stimulate the economy. Stimulus needs larger support for sustaining demand. This is where ₹2.5-3 lakh crore was spent. The second component, liquidity support, was ₹8-10 lakh crore from RBI, and about ₹2 lakh crore from government and others.

The liquidity support was expected to stimulate the economy by generating credit and some investment. This did not work at all. The liquidity RBI provided came back as reverse repo deposits. Credit growth has not taken off. Even Emergency Credit Line Guarantee Scheme (ECLGS) did not disburse to the extent of ₹3 lakh crore; it otherwise would have been a normal loan. So, credit growth is 6-7%, which shows low impact of liquidity measures. The third component was announcement of funds-agriculture infrastructure funds, fund of funds for MSMEs. This aggregate amount of ₹4-5 lakh crore also did not work. Fund of funds has not seen a single transaction so far. Of the three components, only one worked. That is why only 10-12% of that stimulus was actually delivered.

There is policy stimulus too. The corporate tax cut worked. High corporate profits are partly a result of that. It is sad that corporates have earned more profits at the cost of wages and share of wages in value added is down.

Ahya: GDP is not above the pre-pandemic path yet, but has normalised, and with that denominator, expenditure to GDP has gone up 4 percentage points (from about 13% of GDP pre-pandemic to about to 17% of GDP currently). That is reasonable compared to other Asian economies. We don't think the stimulus was small. But everybody got impacted, not many countries have been able to get their economy to pre-Covid path. Very few economies like China and Korea have seen their GDP reach pre-Covid path.

We could not have expected more. India does not have a history of low fiscal deficit. The public debt to GDP ratio is high. This did not allow room for big enough counter-cyclical stimulus. Since 2013, India has had a deep cyclical slowdown, without a proper recovery. It did not have an opportunity to build counter-cyclical buffers. So, the policy response has been reasonable.

Gupta: Three things are clear. One, the announcement was about 15% of GDP, which sounded good because even the best economies could not exceed 10-12%. It seems only 10% was spent. The bulk was direct transfer. The planned stimulus did not happen. Second, capital formation, for which the stimulus was meant, did not happen. One reason is lack of confidence in industry to go through a new capex cycle while facing Covid uncertainties. The mood has changed now. Industry is looking at capex cycles and, therefore, going forward, capital expenditure, including infrastructure capex, should happen. The government does not have to provide too much liquidity for that. There is a lot of liquidity.

Sinha: The pandemic had a damaging impact on global economies. India grappled through the first wave and a very difficult second wave. We are worrying about Omicron now. Under these circumstances, capex and consumption will be constrained. We entered the pandemic with limited fiscal space and did not have the privilege of printing the world's reserve currency. The balance between growth, redistribution and fiscal prudence was managed very well.

Now, the economy is back at pre-Covid levels, business confidence has improved, capex is going up, government is able to put capex to work and we have got the vulnerable population through difficult times. We struck the balance between fiscal prudence and necessary stimulus. We provided support to vulnerable population, MSMEs, and the ECLGS worked well.

Extra credit was available to whoever wanted it. It was difficult for urban migrants who went back to villages, but with private sector investing and capex coming back to life, we will see more high-quality jobs. Exports are strong and we are heading to the $400 billion annual target. Also, two-three unicorns are being created every month. Start-ups are hiring in large numbers. The employment prospects they offer is because of reforms like India Stack. If you look at start-ups and capital expenditure, you will see that prospects are very good. On fiscal deficit, people have been saying we must spend more. We were at 9.5%, and now 6.8%. We have never spent this kind of money except during war. GDP is back at pre-Covid levels, inflation is manageable, unemployment is coming down, jobs are picking up and corporates are finding it difficult to get good talent. All this bodes well for the future. We need to recognise that we have been able to steer through this difficult storm skillfully.

If we look at the four engines of the economy, only public expenditure was functioning. Exports have started growing only in last four-five months. Private investment and consumption remain a worry. Unless three engines are working well, we are probably not going to accelerate fast. How can government accelerate growth?

Garg: You rightly highlighted expenditure-side drivers. These are investment-side engines. I would pick up investment, the biggest driver. We saw a deep hit on capex in first few quarters. It is coming back but not to pre-Covid levels. That offers the largest opportunity.

We need to get policies right. The recent telecom policy package will lead to investments. Similar investments will come in power if policies are set right. We have a debilitating discom system which kills investment. Likewise, in roads, though government is making investments through NHAI, these are leading to a lot of losses. If NHAI is investing ₹30 crore for a kilometre of road and that road is fiscally worth ₹12 crore, it leaves a lot of losses on NHAI's balance sheet. Highways are not getting any private investment.

Private consumption is lower than pre-Covid. This is distressing. It is an area where government support in the form of grants and subsidies was needed. There are many opportunities in the upcoming Budget to kick off the economy.

On exports, we should be a little sombre because global demand is slowing. The real engine to my mind is infrastructure capex and consumption support.

Gowda: A CMIE survey says 97% Indians faced income loss (due to Covid-19) and there are fewer salary jobs now. Data suggests rising malnutrition across the country. When we see that employment generating sectors-trade, hotels, communications, services-are not at pre-pandemic levels yet, that is a huge problem for the masses. We talk about start-ups, but they are a small fraction of the economy in terms of employment generation, income growth and personal consumption.

People across the board are hurting. One way to help them is to lower taxes on items fuelling inflation. Recently, fuel prices were cut, but after hundreds of increases. Fiscal deficit will increase a bit, but that's where privatisation could help.

In private investment, we have worried about excess capacity. But until capacity is fully utilised, you are not going to see much impact. You have to do more for people and give them the sense that they have more in their pockets.

Gupta: Exports depend to some extent on global demand and recovery, but to a very large extent, they depend on scale of production, the cost we can get as a result of that scale, and the quality we produce. PLI schemes are a good step. In telecom and electronics, it has enabled companies to set up large facilities, which will result in big exports. Thanks to the geo-political situation China is going through, India can capture a good part of these markets. Government must invest only where private sector cannot invest.

India would have access to as much capital as it wants. Good projects, good companies, good promoters, will always attract as much capital as they want. What ails private investment is ease of doing business, and second, governance on the part of financers.

The National Digital Communication Policy says government's aim is not to maximise revenue. Then why are 5G reserve prices so high? Instead, put stringent roll-out conditions, as that will mean jobs and higher revenue. Telecom is a wonderful example where government has taken bold steps. Otherwise, this sector could have been reduced to two private players. Also, we do not know why MTNL, BSNL should be funded. They get free spectrum but are still unable to roll out 4G.

Sinha: My perspectives are related to people and businesses. Are businesses willing to invest and grow? Are they putting resources to work, are people finding jobs and better quality of life? If these work out, other GDP macro stuff will work out. Instead of being consumed by challenges, risks and problems, we have to look ahead. The prospects look good, exports are getting stronger and competitiveness is at the core of government policy.

We have seen through PLI schemes that we can be much better exporters and generate surpluses from high productive exports and reinvest that in our economy. That is an important driver for growth. Even in Hazaribagh, where I come from, the role of start-ups from Bangalore is important. Swiggy, Zomato and Amazon operate there. They have been operating in Tier-III, Tier-IV cities and creating opportunities for people.

Ahya: You can argue that you need to drive consumption with some transfers or lower tax rates. That would have helped in the pandemic. If Omicron hits, we could activate that idea. But deficit levels are still high, public debt levels are high, RBI is keeping interest rates low. We have done enough on monetary and fiscal stimulus. Focus on policy reform that supports private investment and divestment for boosting infrastructure spending.

V. Keshavdev: In previous cycles, reckless promoters created a huge NPA burden which the banking system is still grappling with. How can you incentivise private investment?

Garg: We need to get policies right rather than give fiscal support to private enterprises to invest.

We are fascinated with public sector financial institutions supporting private investment. The idea of a national infrastructure company will mean another IDBI or IFCI. We should instead create private sector infrastructure financing institutions, which is difficult. The private sector will be able to make much more sustainable investments. We need to get the privatisation agenda right. The government is a poor businessman. In banking, we have pumped in ₹4-5 lakh crore capital in three-four years, still, credit share of public sector banks is going down. Whether it is insurance, banks or non-banks, we should be aggressive in privatisation. Why has BPCL not been done in three years? We will see much more investments if our privatisation agenda is right.

In the Fortune 500 India listing, companies had bumper profits - ₹6.2 lakh crore against ₹3.8 lakh crore last year. In 2021, big companies managed to restore bottom line very significantly.

Ahya: You need to look at a longer trend. This year's numbers look great because of completely depressed base.

You can't look at absolute numbers. If you want to see the corporate situation, look at profits and wages as percentage of GDP. Share of wages in GDP has gone up while profit to GDP ratio has gone down since 2008. That needs to change.

There is discussion on why corporate sector is not investing. For that, they need to see two-three years of profit recovery. It's not a question of capability. Since 2013, India has seen relatively weak growth environment and corporate profits have suffered weighing on their confidence to invest.

Is there a disconnect between economy and markets? Do you think net zero commitments could lead to green tax and will that be an additional burden?

Sinha: If you're talking about the carbon border adjustment mechanism that EU is describing, that is still being discussed. There is talk of creating an inclusive climate club where, if you've made net zero commitments and have harmonised policies, you won't have to deal with carbon taxes. There are various discussions under way in multilateral fora, be it the COP process or G20.

We have to think what fiscal policies are best to support green transformation. On petrol and diesel, we have excise. There is also a coal cess. We already have very high carbon prices, so how does that get balanced out with what the world is doing?

On disinvestment, I have dealt with Air-India and Pawan Hans extensively. The disinvestment process is complicated. The challenge is not the process or the asset. Practical people who deal with markets recognise there are not many buyers. We have to ensure that the process is transparent, robust and competitive. The challenges in disinvestment are about having buyers willing to take these assets and turn them around even though other assets are available. It's a competitive marketplace.

On markets, central banks are pumping somewhere in the region of $300 billion a month between Fed, British central bank, ECB, JCB and RBI. When you have that kind of capital going into asset classes, you'll find all markets being marked up.

Gowda: When we see Sensex crossing 60,000, clearly there's something going on in markets that is not the same as people losing jobs and moving back to villages. What's happening with markets is partly a result of a lot of liquidity sloshing around. But I hope that it is, to some extent, a reflection of people's optimism that India's private sector has tremendous potential.

Ahya: We have focused a lot on redistribution. That is why our public debt to GDP ratio is high. The only sustainable way to grow is investments. What we need is job opportunities in urban India and reforms in the farm sector to increase productivity. You can push labour from rural India but you need job opportunities in urban India. That needs to happen together, or you will have social tensions.

There is a lot of operating leverage visible in the way corporate profit growth is coming in. So, as you get that initial growth push, you look at rural wage growth, urban wage growth. These are very low right now. So, that gives the corporate sector minimal cost pressure at a time top line is growing. Similarly, capacity utilisation in the industrial sector is low. So, as capacity utilisation improves, operating leverage gives a profit push. And then, more sustainable growth comes from investments, which is also something that we are expecting.

This is a clear inflection in India's macro environment. Rising exports and capex ratios will significantly lift employment prospects and boost income and consumption growth, creating a virtuous cycle. The effective utilisation of both factors of production (labour and capital) will unlock India's structural positives, allowing it to generate robust economic and corporate profit growth. We expect GDP growth to average 7% in FY23-26. This cycle will be unlike the past decade and more like 2003-07.

Gupta: The economy is a broad measurement of what you are doing for the entire population while capital markets are sniper attacks. These are specific companies people pick up. There is corporate performance versus market performance. Now, everybody knows $300 billion a month has to go somewhere.

Keshavdev: You said many things government did seem like optics, but we saw the pullback on farm reforms. Is political opportunism trumping economics? Where do you see reforms two years down the line?

Gowda: The basic problem is approach the government should have taken. It could have been more consultative. You were going to take away income and security from a significant chunk of farmers in three states. They should have figured out how they are going to ensure some transition.

Nobody has a problem with reforms. This government has been all about optics. Unfortunately, it may continue to be that way, as optics seem to be convincing a large number of people. The prime minister promised farmer incomes will double by 2022. The time's up. It's just announcement after announcement. The same thing applies to privatisation. I have never seen them achieve the target.

Large corporates have cut costs, hived off debt and seem to be in a better shape than SMEs. What needs to be done to bring up SMEs because they contribute big time to economic growth?

Garg: There is a lot of romanticism about SMEs, but they are low on technology, capital and produce relatively low quality goods. Some SMEs are outstanding, but of the eight crore SMEs, let's keep our expectations from labour intensive players. That's the biggest advantage. We need a policy shift on handling SMEs. We should get medium companies out of SMEs and focus on the really small ones with one-five people. That is still 7.5 crore enterprises. Almost all of them are unincorporated and can't raise capital, which is their biggest constraint.

What can you do about leaving some disposable income for the middle class for them to start thinking about consumption at a larger level?

Gowda: One way is reducing fuel prices. It impacts overall inflation too. There are many middle classes. Some can be reached with a little tax cut, which is a nice signal and won't make much of a difference. You will find these measures when it's appropriate electorally. There is room for tax cuts. The amount you need to reduce taxes by is not very much and the number of people who will benefit is large.

Gupta: All along, the focus has been on saving. P. Chidambaram, in one of his speeches, said we need to bring down savings and speed up expenditure. Countries grew because they had plastic money. The only reason people could spend freely was state support for basic needs. Whether it's healthcare, or education, the state needs to develop a programme allowing people to spend and not worry much about saving for old age.

On fiscal deficit, with government's capital expenditure programme being what it is, and other engines of the economy not functioning, do you think the roadmap to 4.5% by 2026 is achievable?

Garg: The fiscal deficit last year was because of two factors. First, there was a massive shortfall in revenue and, second, fiscal expenditures were made for clearing liabilities such as FCI's. In times to come, you won't have to clear FCI dues. This year, the government is rightly clearing fertiliser subsidy bills. This strategy to clear arrears is good fiscal management. Government shouldn't hide real expenditures and liabilities. Last year, when revised estimates were ₹20,000-30,000 crore higher than Budget estimates, capital expenditure was not high. If you take away ₹80,000 crore of loans to the railways or operational expenses and deficit, there was not capital expenditure. Real capital expenditure last year was low. This year, there was a major increase, so ₹5.4 lakh crore was budgeted. We need to see whether capital expenditure this year would be close to ₹5.4 lakh crore or ₹4.5 lakh crore. Going forward, I think it should be possible to stick to 4.5% fiscal deficit.

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