Indian Budget in times of National emergency
Recently, Central and State Governments have started cutting salaries, pensions and other benefits of Govt employees and pensioners. These policies are direct result of Central Govt decisions - cutting salary of Central Govt employees and not disbursing adequate funding to States in this times of crisis. State Governments which are revenue constrained have no choice other than to implement salary cuts policies.
How to best describe these Austerity policies implemented by Central Government? Its like this - Central Govt has absolutely no clue on policy making in times of Covid-19 crisis. But to give an impression that they are doing something, they are taking these senseless decisions of salary and pension cuts.
Indian Economy in massive contraction - Unprecedented Macroeconomic uncertainty - Collapse of Revenue and Tax Collection
The situation with economy is critical. There is a massive slowdown in economy due to lockdown as businesses, factories and services by private as well as public sector have either shut down completely or have reduced their operations significantly. Due to this massive slowdown in economy, its understandable that government revenue for Central as well state governments will also significantly go down. Therefore, there will be significant fall in collection of taxes specially GST. As revenue is falling, Govt is cutting spending and implementing various austerity measures salary cuts by imposing DA freeze. The State governments are implementing much harsher salary cuts in range of 10%-50% depending on category and classes of state employees.
Why revenue will fall? Revenue is income of Govt earned by taxing the economy. As economy shrinks, the collection of taxes will also shrink. Why economy is shrinking? Due to lockdown, many businesses, factories and services have closed down. Many people, specially in unorganized sector have lost their jobs. Similarly, many people in organized sector are laid off. As a result, private consumption will collapse. People with lesser money in pockets will spend less. On top of that, the production itself is shrinking in almost all sectors of economy. From Auto sector to construction sector. From FMCG to capital goods. Every sector is cutting production. No one is buying Cars these days. No one is buying new homes or other properties. There is no construction of housing projects. There is no Air travel, tourism, hospitality business etc. All this means lesser collection of taxes and specially GST. India is facing a collapse of Demand, Collapse of Consumption and Collapse of Production - All simultaneously.
While much of the economic impact is due to the lockdown measures, but a big part of it is due to underlying public health crisis. Even if Lockdown is lifted, economy still won't have same level of consumption as it used to be. Many of the businesses will reduce and cut workforce. Social distancing means many types of businesses and services will remain depressed for a long time in the future as well.
Is cutting Govt employees salary the solution in present economic downturn? No!
Government not Revenue constrained - Fiat Money system - Deficits not necessarily correlated to higher inflation - Nation can tolerate moderate inflation if national survival is the priority
Central Government of India is not revenue constrained to spend money. In a fiat currency system, Govt can print (or digitally create money) of desired amount to pursue its budget policy. The only constraint to spending is high inflation and inflation is not rigidly correlated to size of budget deficits. Many economists acknowledge that India's inflation is of structural nature. The structural issues are lack of infrastructure, poorly managed & unregulated unorganized sector, disorganized supply chain of goods, lack of storage facilities for perishable agricultural products, lack of central planning and regulatory oversight etc.
Regarding, size of Budget deficits and fiscal limits. The founding father of India's FRBM (Fiscal responsibility and budget management Act) himself acknowledges that Indian economy is in a dire state and we need to forget about fiscal rules and arbitrary deficit limits. That means RBI should finance Govt deficits what we call it overt monetary financing. That means finance ministry will issue Bonds and RBI will buy them at pre-decided interest rates (ideally close to 0%). In fact Govt should now issue century bonds. Bonds at 0% interest rates with long term maturity of 50 years. These Bonds will be the basis of monetary spending in times of national emergency at least in short term when usual channels of revenue have completely dried up. The ONLY real constraint to Govt spending - Inflation. The goal of Govt is to implement spending policies that maximizes asset creation, increases production and services.
Cause of food price inflation in India is well known. Non-seasonal rains, floods and drought are the most common reasons. Every year, floods destroy large amount of crops. Similarly, many parts of the country which depend upon monsoons for sowing of crops are badly effected in case of poor monsoons or droughts. The flood control infrastructure in this country is very poor. Similarly, irrigation system in rural India is in a bad shape. Other reason for food inflation in present lockdown is major disruption in supply chain - from Farms to interstate travel to Manidis and finally to consumers. The chain is badly disrupted and various bottlenecks have emerged during the lockdown. Lack of proper storage and cold storage facilities in rural India is another reason for wastage of crops.
Do we need Budget cuts?
Coming back to the main point. Government can and now must run budget deficits. The deficits will be financed by RBI. The usual channels of revenue of Government have dried up. The government must support the economy with extraordinary measures for short to medium term.
Do we need to cut Budget? Yes and No. While we need to cut many unnecessary spending programs (who needs a Delhi beautification project right now?). Some of the Defense purchases of can also be postponed. But the salaries and pensions of Government employees must be fully maintained without any cuts. And its appalling to see the salary cuts of frontline workers like Doctors, Nurses, Police and Healthcare staff and also of Military and Army personnel. There is no rational for cutting their salaries. And actually there is no purpose to it. The cutting of salary of Govt employees actually undermines the faith in the Govt during this crisis.
Problem with State Governments is that Center is not giving adequate funding to states in this time of national emergency. State and Local Governments cannot finance their budget deficits through RBI so they have no choice but to cut expenditure and borrow from markets at high interest rates. For example State Govt of Kerala is borrowing at 9% interest rates to cover budget shortfall. This unsustainable borrowing costs is a disaster in the making and Central Govt is totally responsible for this disaster. States should get full financial backing from Central Government. Also temporary special credit facility can be created at RBI where RBI can buy local state and Municipal Bonds at low interest rates (preferably close to 0%).
What should be the budget of central Government in times of present national emergency?
Budget by Modi Govt is reduced to "Bahi Khata". Budget of last several years lacks concrete policies and vision for national development and only considered by "Baniya" mentality Modi Govt as inlays & outlays of money. Budget and economic policies will require a much detailed discussion which i will do at some other time. But some of the outline in present day should be clear.
1. Economy is in massive contraction. Govt revenue will fall. Govt must finance budget deficits through RBI and ignore Fiscal deficit limits of FRBM.
2. Budget policies and spending should be formulated by purely technocratic team to focus on economic management during this emergency.
3. Salary and Pension cuts of Government employees serves no purpose. So no need of any salary and pension cuts specially in case of Military, Army and civilians front line workers like Doctors, Nurses, Police, sanitation workers etc.
4. Central Government should give full financial backing to states to assist them in funding shortfalls in this times of national emergency.
5. Goal of Government budget should be to maximize production of goods and services. Some of the things that needs to be done.
A universal income guarantee will be destabilizing and inflationary. Instead Government should focus on MNREGA. Millions of unemployed people can be put to work in Rural infrastructure development like irrigation and flood control projects. This will have dual benefits. First, rural assets will be created that will be beneficial to support Farm sector. Second, the people will get wages and hence a degree of income and food security in times of national emergency.
Its clear that healthcare spending will be the main focus in Covid-19 crisis. Government should build temporary hospitals and quarantine zones across India as prescribed by technocratic Coronavirus task force. Government should also invest heavily in manufacturing medical equipment, Drugs & testing kits. Private sector should also be partnered with in necessary areas. All vacant positions of Doctors, Nurses and healthcare staff should be filled up urgently. Also make all Doctors and Nurses who are presently on contract basis as permanent giving them all benefits and privileges including retirement pensions.
Government is buck passing on critical question of large scale testing. Free testing and treatment is the ONLY way out of this crisis. And Government capacity in healthcare sector is not sufficient to deal with this crisis alone. Hence private sector should be engaged for mass production and execution of large scale testing. Also private sector is not in a business of charity so government should pay/compensate/subsidize private sector appropriately to provide free testing and treatment. Also all anti-profiteering regulations should be enforced so that private companies don't make exorbitant profits in this time of national emergency.
6. India also need a temporary Debt freeze policy on most of personal and corporate debt. That includes home loans, personal loans, education loans, business loans, auto loans etc. Anybody who has lost a job or suffered a business failure should be eligible for Debt moratorium. All interest payments and EMIs should be frozen without imposing any additional cost or penalties.
The rational for this policy is simple. Since economy is in massive contraction due to a national disaster. Normal contractual obligations cannot be implemented in this time of crisis. India needs a temporary nationwide Force majeure policy or India's banking system will implode with massive delinquencies and bankruptcies.
7. Another critical role of Government should be ensuring a fully functional local and interstate supply chain of goods and clearing all bottlenecks. Breakdown of supply chain will become a major cause of inflation and this must be avoided. Its encouraging to see Indian Railways is doing great work on freight corridors during present emergency. This needs to be maintained and expanded. A mechanism for smooth travel of interstate Trucks and cargo vehicles should also be devised.
The Government budget policy should be based on national priorities. The FRBM has become irrelevant and man who formulated it, himself admits it. The budget should be formulated by competent, visionary and people with expertise. If the Budget was only about picking a Red Pen and omitting/cutting spending arbitrarily to balance and juggle the numbers, even a peon or ordinary clerk could make a budget by taking last year's budget paper as a base. But making National Budget is delicate and complex task which require deep thinking and vision. Unfortunately, it looks too far fetched with Two Mohammad Tuglaqs running the show in New Delhi.
PS - Many countries are monetizing their deficits and their economic relief measures are much more bigger than India. Case in point UK, US, Japan and many other countries.
How to best describe these Austerity policies implemented by Central Government? Its like this - Central Govt has absolutely no clue on policy making in times of Covid-19 crisis. But to give an impression that they are doing something, they are taking these senseless decisions of salary and pension cuts.
Indian Economy in massive contraction - Unprecedented Macroeconomic uncertainty - Collapse of Revenue and Tax Collection
The situation with economy is critical. There is a massive slowdown in economy due to lockdown as businesses, factories and services by private as well as public sector have either shut down completely or have reduced their operations significantly. Due to this massive slowdown in economy, its understandable that government revenue for Central as well state governments will also significantly go down. Therefore, there will be significant fall in collection of taxes specially GST. As revenue is falling, Govt is cutting spending and implementing various austerity measures salary cuts by imposing DA freeze. The State governments are implementing much harsher salary cuts in range of 10%-50% depending on category and classes of state employees.
Why revenue will fall? Revenue is income of Govt earned by taxing the economy. As economy shrinks, the collection of taxes will also shrink. Why economy is shrinking? Due to lockdown, many businesses, factories and services have closed down. Many people, specially in unorganized sector have lost their jobs. Similarly, many people in organized sector are laid off. As a result, private consumption will collapse. People with lesser money in pockets will spend less. On top of that, the production itself is shrinking in almost all sectors of economy. From Auto sector to construction sector. From FMCG to capital goods. Every sector is cutting production. No one is buying Cars these days. No one is buying new homes or other properties. There is no construction of housing projects. There is no Air travel, tourism, hospitality business etc. All this means lesser collection of taxes and specially GST. India is facing a collapse of Demand, Collapse of Consumption and Collapse of Production - All simultaneously.
While much of the economic impact is due to the lockdown measures, but a big part of it is due to underlying public health crisis. Even if Lockdown is lifted, economy still won't have same level of consumption as it used to be. Many of the businesses will reduce and cut workforce. Social distancing means many types of businesses and services will remain depressed for a long time in the future as well.
Is cutting Govt employees salary the solution in present economic downturn? No!
Government not Revenue constrained - Fiat Money system - Deficits not necessarily correlated to higher inflation - Nation can tolerate moderate inflation if national survival is the priority
Central Government of India is not revenue constrained to spend money. In a fiat currency system, Govt can print (or digitally create money) of desired amount to pursue its budget policy. The only constraint to spending is high inflation and inflation is not rigidly correlated to size of budget deficits. Many economists acknowledge that India's inflation is of structural nature. The structural issues are lack of infrastructure, poorly managed & unregulated unorganized sector, disorganized supply chain of goods, lack of storage facilities for perishable agricultural products, lack of central planning and regulatory oversight etc.
Regarding, size of Budget deficits and fiscal limits. The founding father of India's FRBM (Fiscal responsibility and budget management Act) himself acknowledges that Indian economy is in a dire state and we need to forget about fiscal rules and arbitrary deficit limits. That means RBI should finance Govt deficits what we call it overt monetary financing. That means finance ministry will issue Bonds and RBI will buy them at pre-decided interest rates (ideally close to 0%). In fact Govt should now issue century bonds. Bonds at 0% interest rates with long term maturity of 50 years. These Bonds will be the basis of monetary spending in times of national emergency at least in short term when usual channels of revenue have completely dried up. The ONLY real constraint to Govt spending - Inflation. The goal of Govt is to implement spending policies that maximizes asset creation, increases production and services.
Cause of food price inflation in India is well known. Non-seasonal rains, floods and drought are the most common reasons. Every year, floods destroy large amount of crops. Similarly, many parts of the country which depend upon monsoons for sowing of crops are badly effected in case of poor monsoons or droughts. The flood control infrastructure in this country is very poor. Similarly, irrigation system in rural India is in a bad shape. Other reason for food inflation in present lockdown is major disruption in supply chain - from Farms to interstate travel to Manidis and finally to consumers. The chain is badly disrupted and various bottlenecks have emerged during the lockdown. Lack of proper storage and cold storage facilities in rural India is another reason for wastage of crops.
Do we need Budget cuts?
Coming back to the main point. Government can and now must run budget deficits. The deficits will be financed by RBI. The usual channels of revenue of Government have dried up. The government must support the economy with extraordinary measures for short to medium term.
Do we need to cut Budget? Yes and No. While we need to cut many unnecessary spending programs (who needs a Delhi beautification project right now?). Some of the Defense purchases of can also be postponed. But the salaries and pensions of Government employees must be fully maintained without any cuts. And its appalling to see the salary cuts of frontline workers like Doctors, Nurses, Police and Healthcare staff and also of Military and Army personnel. There is no rational for cutting their salaries. And actually there is no purpose to it. The cutting of salary of Govt employees actually undermines the faith in the Govt during this crisis.
Problem with State Governments is that Center is not giving adequate funding to states in this time of national emergency. State and Local Governments cannot finance their budget deficits through RBI so they have no choice but to cut expenditure and borrow from markets at high interest rates. For example State Govt of Kerala is borrowing at 9% interest rates to cover budget shortfall. This unsustainable borrowing costs is a disaster in the making and Central Govt is totally responsible for this disaster. States should get full financial backing from Central Government. Also temporary special credit facility can be created at RBI where RBI can buy local state and Municipal Bonds at low interest rates (preferably close to 0%).
What should be the budget of central Government in times of present national emergency?
Budget by Modi Govt is reduced to "Bahi Khata". Budget of last several years lacks concrete policies and vision for national development and only considered by "Baniya" mentality Modi Govt as inlays & outlays of money. Budget and economic policies will require a much detailed discussion which i will do at some other time. But some of the outline in present day should be clear.
1. Economy is in massive contraction. Govt revenue will fall. Govt must finance budget deficits through RBI and ignore Fiscal deficit limits of FRBM.
2. Budget policies and spending should be formulated by purely technocratic team to focus on economic management during this emergency.
3. Salary and Pension cuts of Government employees serves no purpose. So no need of any salary and pension cuts specially in case of Military, Army and civilians front line workers like Doctors, Nurses, Police, sanitation workers etc.
4. Central Government should give full financial backing to states to assist them in funding shortfalls in this times of national emergency.
5. Goal of Government budget should be to maximize production of goods and services. Some of the things that needs to be done.
A universal income guarantee will be destabilizing and inflationary. Instead Government should focus on MNREGA. Millions of unemployed people can be put to work in Rural infrastructure development like irrigation and flood control projects. This will have dual benefits. First, rural assets will be created that will be beneficial to support Farm sector. Second, the people will get wages and hence a degree of income and food security in times of national emergency.
Its clear that healthcare spending will be the main focus in Covid-19 crisis. Government should build temporary hospitals and quarantine zones across India as prescribed by technocratic Coronavirus task force. Government should also invest heavily in manufacturing medical equipment, Drugs & testing kits. Private sector should also be partnered with in necessary areas. All vacant positions of Doctors, Nurses and healthcare staff should be filled up urgently. Also make all Doctors and Nurses who are presently on contract basis as permanent giving them all benefits and privileges including retirement pensions.
Government is buck passing on critical question of large scale testing. Free testing and treatment is the ONLY way out of this crisis. And Government capacity in healthcare sector is not sufficient to deal with this crisis alone. Hence private sector should be engaged for mass production and execution of large scale testing. Also private sector is not in a business of charity so government should pay/compensate/subsidize private sector appropriately to provide free testing and treatment. Also all anti-profiteering regulations should be enforced so that private companies don't make exorbitant profits in this time of national emergency.
6. India also need a temporary Debt freeze policy on most of personal and corporate debt. That includes home loans, personal loans, education loans, business loans, auto loans etc. Anybody who has lost a job or suffered a business failure should be eligible for Debt moratorium. All interest payments and EMIs should be frozen without imposing any additional cost or penalties.
The rational for this policy is simple. Since economy is in massive contraction due to a national disaster. Normal contractual obligations cannot be implemented in this time of crisis. India needs a temporary nationwide Force majeure policy or India's banking system will implode with massive delinquencies and bankruptcies.
7. Another critical role of Government should be ensuring a fully functional local and interstate supply chain of goods and clearing all bottlenecks. Breakdown of supply chain will become a major cause of inflation and this must be avoided. Its encouraging to see Indian Railways is doing great work on freight corridors during present emergency. This needs to be maintained and expanded. A mechanism for smooth travel of interstate Trucks and cargo vehicles should also be devised.
The Government budget policy should be based on national priorities. The FRBM has become irrelevant and man who formulated it, himself admits it. The budget should be formulated by competent, visionary and people with expertise. If the Budget was only about picking a Red Pen and omitting/cutting spending arbitrarily to balance and juggle the numbers, even a peon or ordinary clerk could make a budget by taking last year's budget paper as a base. But making National Budget is delicate and complex task which require deep thinking and vision. Unfortunately, it looks too far fetched with Two Mohammad Tuglaqs running the show in New Delhi.
PS - Many countries are monetizing their deficits and their economic relief measures are much more bigger than India. Case in point UK, US, Japan and many other countries.
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