Does the budget work on reforms?

To what extent has this budget lived up to the government’s original promise of ‘Minimum Government, Maximum Governance’?

Sanjeev Ahluwalia: ‘Minimum government, maximum governance’ is a difficult objective to achieve in India, where government is so prevalent at all levels of politics. I think the Modi government has certainly made a lot of progress in formalizing and measuring governance reform. But whether this government pursues the agenda of ‘Minimum Sarkar’ or not, it is a bit difficult to guess given the circumstances. There is a coordinated shift around the world towards large governments, as you might have thought normal, let’s say, a few decades ago when regulation was in vogue. Also, don’t forget that protectionism is on the rise not only in India, but all over the world. India is only following this trend and there are some geopolitical concerns which also factor into any action taken by the government. We are making steady progress towards becoming a more private sector oriented economy. Recently some legal changes have been made which aim to provide more certainty to private investors. At least, there is nothing in the budget that detracts from what we have done in the past.

Shruti Rajagopalan: I differ from Sanjeev on this. My version of ‘minimum government, maximum governance’ is to think about what the role of the state is. If I think of a minimalist state, it would be some version of a night-watch state, which provides public goods such as law and order and leaves the rest to the private sector. Because of this I have been disappointed to a great extent with this government. Instead of providing public goods, the emphasis is on making private goods available more efficiently. So, for example, the emphasis has been on providing subsidized LPG and building toilets for certain groups. But these are not your classic public goods. Second, I don’t see any major rollbacks in economic controls, although I think the government tries to streamline them. For example, instead of going through several different windows to get your approval, you now only need to visit one window or two. But it is still a view of the economics of control. Third, the idea of ​​’minimum government’ would mean systematically bringing back the footprint of the public sector. But this government has not had a good record on disinvestment. Air India has won big in terms of privatization. But broadly speaking, when it comes to the big promises that were made to privatize very low performing public sector organisations, I do not see much progress being made.

The Finance Minister mentioned that thousands of laws and compliances have either been repealed or diluted in the last few years. What effect has this had on the ground?

Sanjeev Ahluwalia: For example, with the repeal of all these various restrictive regulations and a single-window approach, there has been a general trend of, for example, what should be a civil offence. But one major thing that the government has been able to do is digitize government processes. While there are privacy concerns, digitization facilitates easy approvals. This speeds up the process, although there is a risk of some environmental clearance being granted without due consideration in order to stick to the timetable. So, there are downsides and upsides to almost every intervention. But there is no doubt that a well-successful effort is being made in making government procedures available to the public, ensuring that the public is able to participate in those processes, and making government interventions as painless as possible.

Shruti Rajagopalan: Well-organized laws are better than unorganized laws. But let’s take labor law consolidation. A big fuss was made by the government that it was going to streamline labor laws, and it would be easier to hire and fire workers. Several different laws were streamlined into four, but there was no real change in the content of the labor laws themselves. Are firms better positioned when they need to look for all relevant regulations in four locations as opposed to 30 different locations? Absolutely. But this is not the only cost that a firm has to face. The real problem is the way labor relations are regulated in India. Hiring laborers has become so expensive in the country that companies do not want to hire workers. We have emphasized either hiring middlemen or in the informal market. Or we have pushed the system towards a more capital-intensive industry instead of a labor intensive one. My fear of streamlining and digitization is that the government’s effective control over private people contracting with each other is just too much.

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Second, even in all streamlining, we criminalize most civil offenses and we do not have the state capacity to enforce these criminal penalties. So, what happens is that you get a very discretionary state. There’s going to be some overzealous or politically opportunistic bureaucrats going to come down on a few individuals with a whole load of rulebooks. And in most cases, non-enforcement or just looking the other way is the norm. Neither of those things bode well for any sensible economic system that requires certainty and predictability. I don’t think enough attention has been paid to that problem in this budget. So, while streamlining and digitization are great, we need a 1991-like moment with the complete elimination of government regulation.

How do you see the government’s approach towards cryptocurrencies in the budget and the introduction of the digital rupee?

Sanjeev Ahluwalia: People are making huge amount of money from cryptocurrencies, so the government wants a part of it. The lure of raising more revenue has forced the government to believe that crypto exists. I think it’s a good thing for the government to recognize a phenomenon that already exists, and try and tax that because that should be taxed, and hopefully the government will try and bring it into the mainstream. Digital currency is simply an efficiency-enhancing mechanism, where you reduce the cost of hard cash management and circulation and gradually move towards settling payments digitally.

Shruti Rajagopalan: I think in the process of making cryptocurrency taxable, the government has gotten the heck out of it that it no longer intends to ban it. So in this respect it is a welcome step. I have always believed that if he understands the underlying mechanisms of blockchain technology, he will understand that it cannot be banned. Therefore, you would instead want to keep it integrated with the rest of the economy so that everyone can take advantage of it rather than driving it underground. Second, the government has capitalized on raising some tax revenue at the moment, but I still think there needs to be some underlying policy framework for how it thinks about crypto as the root cause of banning crypto. Was that it was very unstable. So, you have to choose: is it too volatile, in which case you have to think carefully about allowing losses to be carried forward along with tax income, or do you want to capitalize on profits? Either way, the policy should be consistent.

And with respect to the digital rupee, I don’t see it as competing with other cryptocurrencies, in the sense that it is completely decentralized and no individual or entity is able to control or increase the money supply. But I think if the government doesn’t have a coherent policy on the rest of the crypto market, it will end before the birth of the digital rupee because no one is going to invest in just digital rupees without a really fat crypto market. . There are a large number of buyers and sellers.

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Lastly, it doesn’t look like the Indian Digital Rupee is going to become the global standard in the crypto market. If India wants to prevent other countries like China from dominating that market, it should allow for a very thick and vibrant crypto market with lots of other cryptocurrencies that are not controlled by the government.

What do you think about the Finance Minister’s remark that public expenditure will “crowd out” rather than “crowd out” private investment? Also, what do you think of the budget’s emphasis on Atmanirbhar Bharat?

Sanjeev Ahluwalia: We are never too sure of our domestic competitiveness and are mindful of the fact that our markets may be captured by foreign competitors. So, while Atmanirbhar stands for self-reliance in its essence, a large part of it right now is actually providing home security as an incentive to investors who want to shift their production processes from other places in the world to India. So, Atmanirbhar is not really something that is seeking to enhance competitiveness, which is the best way to become a truly resilient economy. This is demanding more to provide the nascent industry’s argument that we need to protect the domestic industry and protect the MSMEs, which are doing badly during the pandemic. I hope that once we get back to more normal times, these home security measures will be gradually rolled back and we will open up the industry to more competition.

In the crowd-private investment of public investment, it sounds fine as a statement. Of course, if public investment were to produce better infrastructure and longer-term projects, it would be wonderful for the private sector. But if public investment is going to try and substitute production for private goods, I don’t think we have the firepower. This would mean that in the short term we would exclude the private sector as we would be borrowing. More interesting are public schemes to free private investment from risk.

Shruti Rajagopalan: Atmanirbhar Bharat is a protectionist. I don’t think it is conducive to development at all. A good development statement would be announcing a commitment to gradually lower tariffs year after year and then reach a specific target. The Modi government with the slogan ‘Atmanirbhar’ and ‘Make in India’ is more protectionist than ever. In addition, tariffs on capital goods increase the cost of basically everything that is produced in the economy.

On your second issue of crowd out or crowd in, I have two points. One, I think investment in health and education is completely missing in this budget. In fact, outlays have actually decreased but they are the types of investments in standard public goods that have the long-term effect of crowding out other private investments. I think infrastructure investment is not the worst thing, but I don’t think the multiplier to attract private investment is that high. There is a second issue to consider. When the government is not able to raise enough revenue, and is committed to borrowing, it is actually reducing the ability of the private sector to borrow cheaply in the market. So, if you think about gross fixed capital investment overall, gross fixed private capital investment is going to decline.

Shruti Rajagopalan is an economist at George Mason University’s Mercatus Center; Sanjeev Ahluwalia is an advisor to the Observer Research Foundation