India Budget | Budget Ideas: View: Rain drops on roses and whiskers on kittens, not quite the challenges on Budget-eve

As Budget Day draws near, the business press tends to focus on likely Budget announcements, chiefly changes to assorted tax rates, apart from the size of the fiscal deficit relative to the value of the economy’s overall output, or Gross Domestic Product. This misses out on some crucial aspects of what needs to be done.

The world is fragile. Global warming has made extreme climate events more frequent and ever more erratic. The world economy flounders, as output growth slows in most major economies but stock markets boom, thanks to the liquidity sloshing around in the world’s financial plumbing, after quantitative easing (QE) by the US Fed, European Central Bank, Bank of Japan and Bank of England pushed out additional cash amounting to trillions of dollars in the hope of averting prolonged recession in the wake of the Global Financial Crisis. Only a fraction of the liquidity so created has been pulled back by the concerned central banks by running down the stock of bonds they had accumulated.

At the same time, the developed world is experiencing a domestic backlash against globalisation. President Trump wants to make America great again by setting aside the rules-based world order past American administrations had taken the lead in forging, and by acting out the rule of the jungle that might is right. Xenophobic parties are on the rise across most of Europe. Under President Trump, America has turned its back on several superpower obligations, creating a power vacuum that China is only too happy to move into and occupy. China’s relative rise is a headache for India, as New Delhi struggles to maintain strategic autonomy, with clever diplomacy and meagre budgetary outlays.

India faces several structural problems that a tweak of tax rates or budgetary allocations cannot address. Take the sector that employs the largest proportion of the workforce, agriculture. Wrongheaded policy has misaligned crops and favourable agroclimatic conditions (water-guzzling sugarcane in arid Maharashtra) and skewed production towards particular commodities (72 million tonnes of wheat and rice stew in official stocks). Political pandering creates mountains of subsidy, for power, fertiliser and higher output of price-supported crops, while starving the sector of needed investment.

Take power. Politics has trained sections of consumers not to pay for the power they consume and to expect patronage of theft. Different state utilities suffer unpaid-for power distribution of 20-40%, go broke, default on or refuse to enter into power purchase agreements with new generation capacity, driving these to bankruptcy. Populist politics thus saddles banks with tons of non-performing assets. And the only response from the government has been to do financial engineering of utility losses and outstanding dues.

Take excessive capital costs. India is a complex society and politics in this complexity is an expensive business. Parties spend tens of thousands of crore rupees on necessary activity and mobilise the resources non-transparently, even the opaque electoral bonds accounting for only a fraction of their actual spending. This creates opportunities for politicians to make personal fortunes as well. All these funds are derived from companies and their promoters, forcing them to forgo corporate governance and honest accounting. Worse, this entails exaggeration of project costs, so as to take out bank loans that are larger than actually required. Padded project costs make pricing of the output globally non-competitive, create demands for protection.

Mobilising political resources in this fashion suborns the state machinery, making civil servants and bankers collude in corruption.

Ever larger numbers of Indians migrate for work. They travel – by road and rail. Transport capacity trails demand. Populist politics prevents user charges that would generate funds for investment in increasing capacity. Poor logistics preclude India joining global supply chains in manufacturing.

Public spending on healthcare is 1% of GDP, forcing people to make out-of-pocket expenditure on healthcare, often a prescription for plunging the family into poverty. In response, the government has embarked on an insurance-led healthcare model, which is a recipe for very high costs: its exemplar, the US, spends about 18% of GDP on healthcare, whereas Europe provides better care with outlays about half that much as a share of GDP.

Education is dysfunctional, ruining the future of India’s young and raising the cost of employable labour for industry.

In the middle of all this, we have sectarian politics that divides people on the basis of religion, forgetting the lesson from Sri Lanka, that a minority, when stripped of dignity, will revolt in the most destructive fashion and that attempted selective oppression of a section of the people ends up oppressing all the people and destroying democracy.

These are some of the problems that have to be confronted by the state and society. If society loses trust in the state, solutions will prove elusive. The state has to regain trust and involve the people in finding solutions.

How much of this can be addressed by the Budget? Even in the matter of fiscal resources, leave aside the political will or desire to fix problems, India’s tax collections, at 17% of GDP, compare with those of sub-Saharan Africa.