Grand Tamasha

Sukumar Ranganathan on India’s Budget Breakthrough

Episode Summary

Sukumar Ranganathan, editor in chief of the Hindustan Times, joins Milan to kick off season 5 of Grand Tamasha!

Episode Notes

On Monday, the Indian Finance Minister Nirmala Sitharaman presented one of the most highly anticipated Indian budgets in recent memory. Facing a global health pandemic, a severe economic slowdown, and continued anxieties over inflation, some commentators argued that this budget was not simply the most important of the Modi government’s tenure, it was one of the most important in three decades.  


To breakdown this year’s budget and to kick off the fifth season of Grand Tamasha, Milan was joined by Sukumar Ranganathan, editor in chief of the Hindustan Times. Sukumar and Milan break down the nuts and bolts of the budget—from spending priorities to the fiscal deficit and the government’s ambitious plans for disinvestment. The two also discuss the government’s broader economy strategy, including India’s continued inward turn on trade. 


Episode notes: 

  1. Editorial, “What Union Budget 2021-2011 Gets Right,” Hindustan Times.
  2. Roshan Kishore, “Where the Budget Gets India’s Economy Wrong,” Hindustan Times.
  3. Yamini Aiyar, “Decoding the Budget and the Economics of Welfare,” Hindustan Times.
  4. Shoumitro Chatterjee and Arvind Subramanian, “India’s Inward (Re)Turn: Is it Warranted? Will it Work?



Episode Transcription

Milan  00:11

Welcome to Grand Tamasha, a co-production of the Carnegie Endowment for International Peace and the Hindustan Times. I'm your host, Milan Vaishnav. On Monday, the Indian finance minister, Nirmala Sitharaman, presented one of the most highly anticipated Indian budgets in recent memory, facing a global health pandemic, a severe economic slowdown, and continued anxieties over inflation. Some commentators argued that this budget was the most important of the Modi government's tenure, and arguably one of the most important in three decades. To break down this year's budget and to kick off our fifth season of the show, I'm joined by Sukumar Ranganathan, editor-in-chief of the Hindustan Times. I'm pleased to welcome him back to the podcast for the second time. Sukumar, thanks for taking the time.


Sukumar  00:52

Happy to do this.


Milan  00:54

So, before we get into the fine print and the nuts and bolts of the budget, tell us a little bit about the broader economic backdrop facing India in 2021. Within that backdrop, what did the finance minister need to do in this budget presentation?


Sukumar  01:13

Actually, if you want an accurate backdrop, you'd have to go back farther than 2020 – you will have to go back to 2018 and 2019, because the Indian economy was already slowing, and it had been slowing consistently even before the pandemic struck. And the main reason this was happening was the lack of demand. People argued that it was cyclical, people argued that it was structural, but it all boiled down to a lack of aggregate demand. And then the pandemic hit. So, it wasn't as if the economy was growing rapidly before the pandemic – it was growing, but it had been slowing consistently. And then, of course, the pandemic hit. India was one of the earliest countries to impose what I'd like to call a “hard” lockdown, because it was pretty hard, and it lasted for 68 days, so it was long. And even after the 68 days, the return to normalcy has happened in phases. It isn't as if everything was opened up immediately. And this clearly took a toll on the economy, it took a toll on jobs, it took a toll on incomes, it took a toll on business activities. And, of course, in addition to everything, there was a pandemic, right? I mean, there were people falling ill, hospitals were getting completely overwhelmed with the number of patients they were having to deal with. So, you had that on one side, and you had the economic issues on the other side. And then things started improving a little bit, and the budget came, and I think the challenge before the finance minister was really to revive growth, and more importantly, to take care of the health aspect of things. I mean, one of the things that all countries are increasingly going to focus on going forward is health. Most of us thought that we were prepared, and clearly, we weren't right. Even the countries that thought they were exceedingly well-prepared – the Scandinavian countries, for instance, which have excellent public health systems – found themselves really scrambling to deal with this. You look at Germany, for instance, which I think is a great example, which has, I think, per capita, more ventilators than any other country in the world, but the unfortunate thing is they don't have enough people who know how to use them. So, their soft infrastructure is lacking. And countries are discovering all kinds of issues. And the finance minister had to deal with the health aspect of it, but then she also had to deal with growth. She also had to, in some ways, take care of the fiscal deficit. I mean, I think India decided pretty early on that it wouldn't worry too much about the fiscal deficit, but it still doesn't make sense to let it balloon out of proportion, although I think the world is a lot more forgiving of fiscal management right now than it was. The classic example is Indonesia – they monetized part of their deficit. Had they done this four or five years ago, you would have had analysts in all parts of the world standing up and crying out, and there wasn't even much of a whimper. In fact, the only debate after that was whether this was a model that other developing countries could follow! A reaction like that – I mean, it was completely surprising. So, I think the world is in a very, very different place right now. And I think this is probably a once-in-a-lifetime kind of budget for anyone. It's a once-in-a-lifetime budget for the finance minister who's presenting it, for people like us who are looking at it and trying to rate it... It's a once-in-a-lifetime budget because the situation is so unique, it's so strange, and the challenges are so significant that you really don't know how it's going to be done until it's actually done.


Milan  05:24

So, one of the big debates going on in India since the onset of the pandemic – and in fact, this has been a debate amongst foreign commentators and editorial boards as well – is whether or not the Modi government has been too miserly when it comes to its fiscal response to the COVID pandemic and of course the resulting economic dislocation. In your view, did the government finally decide to deploy its fiscal arsenal in this budget?


Sukumar  05:52

It depends on what you define as “fiscal arsenal.” Did they go out and put more money in the hands of people? No. Did they cut checks that establishments like restaurants or multiplexes would receive or that small businesses would receive? They did not. Did they offer salary furloughs of the sort that some countries did? They did not. So, I don't think the Indian government offered that kind of fiscal support. It did put money in the hands of the poorest, the underprivileged – there were around 400 million poor people into whose accounts cash transfers were made at the peak of the pandemic. It did launch a very, very sweeping food program, which benefited hundreds of millions of people – I think around 800 million beneficiaries of that food program – which lasted for much of the peak of the pandemic, it lasted for around six months. [The government] announced credit waivers, announced moratorium on debt, made it easy for banks to deal with potential bad loans, offered credit to alien companies, but [it] didn't really do the kind of direct cash transfers, either at the individual level or the business level, that some of the other countries did. And I think this is probably a philosophical position that I think the government took because it didn't really ever seem to buy the argument that this was necessary other than at the bottom of the pyramid.


Milan  07:44

But this is a major competing storyline which is emerging from this budget if you read the commentary, right? So, HT's own Roshan Kishore had a piece in which he said that the fiscal impulse of this budget is actually quite limited. Analysts in other places have argued that, actually, the strong focus on capital expenditure in the budget implies a significant fiscal multiplier. So, how do we think about what the overall stimulative effect of this year's budget actually is?


Sukumar  08:16

No, I think that's a great question, and it's a logical progression from what we were discussing. Because even though the government didn't put money in the hands of the people, which is one form of a direct fiscal stimulus, I think what it did, even during the pandemic, was to focus on infrastructure creation, and what it has done in this budget is to focus even more strongly on infrastructure creation. If you look at the public expenditure, the government spending in this financial year, which ends on March 31, and the next financial year for which the budget has just been announced, I think you will notice that there has been a significant reduction in operational expenditure and there has been a significant increase in capital expenditure. So, the government's own bet – and this is what the finance minister told me in the course of an interview today – the government's own bet is that by investing in productive assets, you're actually setting off a virtuous cycle of demand. If you're going to build things, you're going to need cement, you're going to need steel, you're going to need people to create jobs. And if you go back in time and look at the Indian economic history, every single boom or mini-boom in India has been preceded by an increase in construction activity. When you're building projects, you're really embarking on significant construction activity, and construction also happens to be the biggest employer of non-skilled labor, including agricultural laborers. The way it works is that, during the agricultural season, these people are in their villages either working as agricultural laborers or tilling their own small plots of land in many cases, [and then] in the offseason, they are in the cities actually working on construction projects, because that is the biggest employer of unskilled labor in this country. And I think that is what the government has bet on, that with things returning to normal – and if you look at many of the so-called “resumption indices,” right... Nomura puts out a fairly interesting index, which factors in a lot of very smart parameters, including the Google mobility index – I mean, the advantage we have in this day and age is you can pull data from everywhere, you're not dependent on some crusty old economic data, you actually get data in real time – they put out a weekly index, which is based on several parameters, and I think that's nearing normalcy. The last time I checked, it was in excess of 90%. 


Milan  11:13

It's 96% now, yeah.


Sukumar  11:15

It's 96% now, yeah. So, pre-pandemic activity is 100%, so it's right up there. And I think that clearly shows that business activity is returning to normal. We have anecdotal reports of industries that were forced to shut down or that were forced to downsize or scale down their operations at the peak of the pandemic suddenly discovering the need for the same labor that sort of went back home. So, they're actually sending out labor contractors – some of them are hiring fleets of buses and sending them out to get people back to work for them to the cities. So, I think you're seeing some of that activity. The interesting thing is, clearly, there are still several businesses that are in bad shape, especially small businesses. There are still many people who have suffered a loss in employment, many people have seen a reduction in salaries, a lot of people have taken salary cuts, or a lot of people have seen their earnings fall simply because their business has gone down. And the question is whether this growth will benefit them or whether the government should have continued to focus on much more of the welfare kind of spending. And I think that's really the argument that you have between one group of economists and the other. And the government's own belief is that investing in growth will help. These economists are saying, “We are not so sure, because we think there's still distress, so maybe you should have done this.” Now, I think the unfortunate aspect is the government is clearly not in a position where it can do both, right? Money is not infinite. We'd all like it to be, but I don't think it is. And so the government has chosen to plan for growth, and these people are saying you should have continued to [focus on welfare spending]. And I think this is not a debate that you can resolve immediately. I think it's something that will get resolved over the next few months. There are some high frequency indicators that are clearly showing a sequential recovery. But there are equally some indicators that are showing that employment has still not recovered. So, you're going to see over the next few months how this plays out.


Milan  13:46

I want to get back to something that you said earlier, which is about the deficit. One of the headlines emerging from Monday is the size of the deficit. It stands at 9.5% of GDP in FY '21 and is projected to go down to about 6.8% for FY '22. By FY '26, as we look over at the kind of medium term, this government says the deficit will be down about 4.5%. Now, that's a stark contrast to what was the earlier target of a deficit, around 3%. Now, of course, as you alluded to, many economists are saying, “Look, this is a sui generis moment, the government had no choice given the size of the COVID shock.” But is it correct to conclude from this, then, that there's no price to pay for this large deficit?


Sukumar  14:36

I don't think they had an option in this case. And before we talk of the deficit, I just want to make one comment, which is also about the deficit: I've been covering the budget for a long time. I've lost track of how many budgets I've looked at. And I think these macroeconomic numbers that that were presented in the budget look real to me. I mean, they look pragmatic. And you must have read about these efforts that the finance minister has taken to move a lot of off-balance sheet spending into the balance sheet. So, the numbers are actually very transparent. The assumptions are very pragmatic. I don't think they've made hugely ambitious or aggressive assumptions for tax revenue.


Milan  15:27

In fact, some have said that they have been very conservative, maybe they will be surprised on the upside.


Sukumar  15:32

Maybe they will be. Because even on growth, I think they've been quite conservative, which is what the finance minister said – again, in our interview yesterday, she said, “My job as finance minister is to be conservative. I can't go out and take a very, very aggressive target and then fail to meet it.” I think what they've done is – even in terms of nominal growth, they assume 14.4% nominal growth, which is a full percentage point lower than what the chief economic adviser put out in the economic survey just a few days before. So, I think they've been extremely conservative. And is there a price to pay for this fiscal deficit? Will it crowd out private investment? Well, for the next 18 months, I'm not sure private investment is something that you're going to have to worry about. So, that's a problem that you can compartmentalize, right? I mean, you don't have to worry about it right now. Will international rating agencies look at this and say that there's something wrong with this country? I'm not so sure, for two reasons. One, if you look at many of the other macroeconomic numbers, they look solid. This is not the kind of situation that India found itself in in 1991, when it had to sell the family's silver. This is an entirely different situation. If you look at its own forex deposits, or if you look at any of the other macroeconomic indicators, the external situation, India has been very responsible in terms of its debt repayment. It's not the kind of country that sought a rescheduling of debt. So, I think, given the situation, and given the fact that other macroeconomic fundamentals are reasonably strong, I'm not sure that the international credit rating agencies are suddenly going to look at this country and say, like, “There is a risk here.” And I think that every economy in the world is probably getting very, very aggressive with its fiscal deficit right now – I mean, aggressive not in terms of clamping down on it, but in actually taking an expansive fiscal position, which is exactly what India has done. 


Milan  17:59

You know, if you look back at what economists had written down on their wish list prior to the budget, right – every investment house issues a kind of pre-budget note, your editorial pages were filled with people's to-do lists – it's actually striking to me that many of their “priority asks” were implemented, right? So, if you look at the budget, [there's a] significant emphasis on disinvestment, on strategic sale of public sector banks, of government companies, as well as monetization of government assets and land and so on and so forth. Now, would you go so far as to say that with these pledges, this budget marks a significant departure insofar as the Modi government's kind of overall economic approach is concerned?


Sukumar  18:52

I would think so. I think this budget is more to the economic right than many other budgets that we've seen until now. The Modi government has been fairly happy to be very, very centrist in terms of its economic policies, and I think this clearly marks a shift. I think it's among the first... You know, in India, it's a strange thing. People don't like to use the word privatization. They prefer to use the word “disinvestment” or “divestment.” And I think the finance minister used the term privatization. This is a country that nationalized banks. For it to go out and say that, you know, “We are actually going to privatize two state-owned banks,” is very, very significant. I'm sure it's going to take time – there is going to be opposition, there's going to be political opposition, I have a strong feeling that the bank unions will also probably oppose it. But if the government wants to push it through, it can push it through. And the fact is some of the state-owned banks are not in great shape, they are not in a position where they can scale up and become really big banks. India doesn't have really big banks. If you were to draw a global list of banks, you wouldn't find a single Indian bank in the top 25, I would think perhaps even the top 30 or 35. And there is a reason for that. I don't think we've allowed banks to get really big, and many of the state-owned banks can't. Sure, State Bank of India, with the right kind of inputs, could be able to get there, but given the size of the country and given the size of the economy, India needs ten State Banks of India, and we don't have that. So, I think the privatization of banks is a good move. The privatization of the General Insurance Company – again, a move that will provoke some opposition, and some people might think it's not a good idea. I think it's an interesting idea. And there haven't been any targets that have been taken against any of these because I think the minister anticipates the challenges, but [she] has clearly said that we are going to monetize the land belonging to state-owned companies, which is a hugely sensitive... I mean, it's the kind of issue that, I think – if you go back in time and you look at the first disinvestment exercise, or the privatization exercise that India carried out where companies like BSNL were privatized, there was a huge issue about the land until it had to be sort of carved out and kept aside and not really transferred to the company that was buying the rest of the company, buying the rest of BSNL, which was Tata. I think it's very, very aggressive in terms of some of these indications of intent. They're very, very pro-reform. And I think this is something worth noting. If you look at many of the things that this government has done and which the finance minister has done over the last year, not just now, India actually seems to have used this crisis as an opportunity to, one, clean its books, because you don't have off-balance sheet items, you've moved all of them, your numbers are transparent – now, I don't think there's anyone who's going to look at the numbers and say, there is a problem here – and, two, embark on significant structural reforms. Sure, some of them are facing opposition, including the farm reforms, but many of us have been calling for the same farm reforms for quite some time, including parties that are currently opposing it. I don't want to get into the political thing, but look at what a lot of us who've covered economic issues for a long period of time, as I've done – we've all spoken about the need for agricultural reform. We've all written specifically about the need for market reform in agriculture. And that is exactly what the government is trying to do. And it's happened in the course of a year when this country is going through a significant crisis because of COVID. So, I find it very interesting.


Milan  23:03

There's obviously a lot to cheer in this budget, Sukumar. But the finance minister at the very end of the speech also announced a continued rise in import duties, which some argue could hurt India's export competitiveness. You know, there's a recent paper by the former chief economic adviser, Arvind Subramanian, and Shoumitro Chatterjee, which argues that contrary to a lot of conventional wisdom, India has actually been an exemplar of export-led growth if you look at the last 20 to 30 years. Does this continued inward turn concern you at all?


Sukumar  23:37

I'd like to answer this at two levels. At one level, it's clearly worrying. It's not the kind of thing that I think any country should be doing it. But I have a feeling that it is probably the kind of thing that a lot of countries will be doing, especially in the wake of COVID. Countries do tend to start looking more inwardly and they tend to become more protectionist when they're faced with a crisis like this. I think, over the next two years, it'll be interesting to see how rapidly global trade bounces back, because I think that is going to be a significant casualty of COVID. So, yes, it is worrying. Specifically, in a lot of cases where the cess, for instance, has been levied, you notice that the import duty has been reduced, and then the cess has been levied on top of that to ensure that the net price for the importer and for the end consumer is pretty much the same. It doesn't really change. So, that needs to be factored into account for several products. But, equally, this is clearly a reflection of what the government likes to call Atmanirbhar Bharat: self-reliance. And if you're going to look at boosting some local businesses, you will have to increase a few import duties. Now, some of these might just be trying to reset a calibration that's gone awry – for instance, end products, the duty on end products is lower than the duty on intermediaries, and things like that. But in some cases, the motive is purely protectionist. And I think that is something that no government can avoid or escape at this point in time. I don't think it's happened across a spate of products. I don't think it's happened significantly enough for us to really lose sleep over it. But I think the fact that there is this undercurrent in the budget means that this is an area that we will have to closely watch, simply because the current model of how things work in the global economy is sort of built around global trade, is built around globalization, and the easiest way to sort of undermine that is for countries to just go off and increase their import duty significantly, making their own uncompetitive products more viable in the local market than far better products from abroad. And so it is something you will need to watch for. But, like I said, it hasn't happened at a scale that is a cause for concern right now.


Milan  26:37

One of the other moves the finance minister made was that she announced the government's intent to allow foreign direct investment up to 74% in the insurance sector. You know, sitting here in Washington, I can tell you that the global insurance industry has been agitating for this move for many years now. You hear the company lobbyists talk about it all the time. At the same time, a few days prior, there were stories emerging in the Indian media that the government is in a lot of hot water over another set of proposed changes to FDI regulations and e-commerce and online retail that would hit global companies like Amazon, like Walmart, Flipkart, and so on and so forth. So, how do you think about this latest move? Is it really just about optics, or do you think there's a directional shift going on in government?


Sukumar  27:24

I think you'll have to compartmentalize these two again and look at them separately. And I'm not sure that there is a philosophical change when it comes to these two – or, I don't think there is a new way of thinking that has suddenly emerged. The insurance move, the move to allow foreign direct investment up to 74% in insurance companies, it's a good move, it will happen. And I think you should leave it at that. And now, thinking back, retail is probably a story that goes back 30 years. There have been so many changes in retail because in the nineties, India did allow foreign retail, even in supermarkets, and then it changed its policy, and then it changed its policy again. And then it had to evolve a new policy for e-commerce. And these are clearly not e-commerce companies but e-commerce platforms, because India allows e-commerce platforms, but it doesn't allow e-commerce companies. I think we've made it fairly complex. And the reason we've made it fairly complex is because I think we are worried that we will hurt the prospects of millions of Kirana shop, corner shop owners in this country. My logic is simple: if large Indian retailers are not going to hurt their prospects, I don't think large foreign retailers are going to hurt their prospects; if large Indian retailers are going to hurt their prospects, then large foreign ones will. So, I think you just have to level the playing field. If you are allowing large Indian businesses – like Reliance, like the Tatas – to operate in the retail sector, there is no reason why you should not allow large foreign retailers to operate in the sector as long as they follow all of the laws of the land. Not a bad idea to have some sourcing restrictions, because at the end of the day, you do want small businesses in this country, many of which are good businesses, but you want to give them an opportunity to scale up. So, that's not a bad idea. But I don't think you should have different rules for different companies.


Milan  29:48

Let me ask you one more specific question on the budget, which is, if you rewind the clock to the pre-COVID era, there were structural factors in the economy inhibiting growth even before the pandemic stress. This is how we began this conversation. One of those was the so-called “twin balance sheet problem,” right, which was the kind of mix of toxicity of bad loans on the balance sheets of public sector banks on the one hand, and on the other hand, the over-indebtedness in the infrastructure companies and the big investors. Now, the finance minister announced the government's decision to set up a “bad bank” that will hold stress assets and then sell those to investors at a reduced price. The government has been consistently resisting this move for years now. Do you think it was right to finally back down and endorse this idea?


Sukumar  30:37

I've personally written a lot of editorials asking for a bad bank, so I think you're just going to get one kind of answer. The thing that I'd like to understand a little better is whether the government is really serious about this being a bad bank or whether it is going to be another asset reconstruction company. Because if it is really going to be a bad bank, I think what you're effectively doing is you're bundling that debt, taking it away from the banks, freeing them up to lend more, and giving it to another company, which can then go out and try to recover them. And if you look at the United States' own TARP program, launched after the global financial crisis in 2009, it had significant success. So, there's no reason why that won't succeed. At least some of this bad debt relates to assets that exist on the ground. For instance, a lot of the debt is in the power sector. And it's not as if the power plants aren't there – the power plants are there. So, you know that there are some assets, and a lot of the debt has to do with infrastructure projects. It has to do with roads, it has to do with ports. Why then has this issue of bad loans then come about? In some cases, it's clearly financial mismanagement. In some cases, it's also happened because there are resource problems: there are problems with fuel for power plants, there are problems with land – land acquisition in India is a nightmare. It's the reason why every company wants the government to acquire land and transfer it to them, because they just don't want to get into this mess. It's a hugely complex process. Very, very litigated. So, in some cases, it's that, and in some cases, it's simply the fact that we've not had institutions that are capable of lending because banks should not be lending to infrastructure companies which have a 20-year window. Insurance companies should be the kind of development financial institution that the finance minister announced in this budget, they should be, but banks shouldn't. It results in a classic asset-liability mismatch, and at least some of the problem is also because of that.


Milan  33:05

So, let me ask you one final thing, Sukumar, which is not about the budget per se but something that is budget-adjacent, I guess, which is that the government tabled the final report of the 15th Finance Commission in Parliament. There has been a lot of anticipation about this report because of the trust deficit which has broken out between the center and the states over the goods and services tax, but also over fiscal transfers. What do we know about the kind of broad summary headlines of what the Finance Commission is recommending going forward?


Sukumar  33:40

I've looked at some of the highlights of the report – I have not gone into it in great detail – and on the face of it, a lot of the fears that were there, I don't think are evident in what's been recommended. For instance, one of the fears that a lot of the southern states had – because the southern states have done extremely well in population control, they were worried that because this report would be based on the 2011 Census as opposed to the 1972 Census, there could be a change in allocations to them. And the Finance Commission seems to have gotten around it by saying that the allocation right now seems fair even if you take into account the 2011 Census, so it sort of skirted the problem. There has not been a huge change in the devolution formula. If you remember, the last Finance Commission made a significant increase in it by 10 percentage points, and there were fears that that would be rolled back to some extent. Again, the Finance Commission has not done it – it's just reduced it by one percentage point because one of the states which was there, Jammu and Kashmir, is no longer a state, it's a union territory, which means that spending will have to come from the center. So, that change has happened. So, I don't think a lot of those concerns have played out. But we'll have to see what happens going forward, because I think, fundamentally – and you put it very well – what we've seen over the last two and a half years is a huge and yawning trust deficit that is just increasing between the center and the states. So, when GST was passed, there was a lot of bonhomie, and everyone spoke of cooperative federalism, and I think we've really taken several steps back from that. And there has to be some way in which you can bridge this trust deficit. In the absence of it, easy things are really going to be very difficult because you can't manage a country of this size sitting in New Delhi. It's the reason the Indian Constitution is framed the way it is – the primary response to COVID, for instance, has to come from the States. It's not something that – sure, the Centre can ID it, the Centre can streamline things like vaccine identification, because you can imagine the kind of chaos there would be if each state were to go out on its own vaccine identification and purchasing drive. But I think a lot of the implementation has to happen at the state level. So, you need to find a way of bridging that deficit. Quite honestly, I am not sure how that can happen, but we'd all be in a much better place if it did.


Milan  36:45

My guest on the show today is Sukumar Ranganathan. He is the editor-in-chief of the Hindustan Times, and he has just given us think a masterclass in budget analysis. Sukumar, thank you so much for joining us. This is a one of the busiest times of the year for any newspaper, so we appreciate you taking some time out for us.


Sukumar  37:01

Thank you, Milan. I enjoyed chatting with you.