There was a time when the finance secretary would address journalists the morning after the budget (which was presented at 5pm then) and was repeatedly asked to guess the likely impact of the budget on inflation. This was the era of deficit financing and demand-side stimulus.
The latest budget presented by finance minister Nirmala Sitharaman strives for fiscal consolidation while making a slight pivot to demand generation. It, therefore, begs a different set of questions: how will some of the ambitious budget measures be implemented and whether the budget’s solutions avoid getting to the root of the problem.
The FM’s budget, while pushing the continuity narrative, is also a response to the 4 June poll outcome, in which the ruling Bharatiya Janata Party (BJP) suffered an unexpected jolt and had to rely on coalition partners to reach the majority mark in Parliament.
The BJP’s electoral setback was attributed, somewhat intuitively, to rural distress, stagnant real wages and large-scale unemployment. The FM’s budget tries to address some of these core problems.
Unfortunately, the details are where the devil resides.
The FM has tried to address the unemployment problem with a multi-pronged scheme that has a time horizon of one to five years and entails employment-linked incentives accruing to both employees and employers.
The umbrella scheme, with an outlay of ₹2 trillion and expected to benefit over 40 million job aspirants, has been designed to nudge and incentivize industry into hiring more labour. This is also the government’s way of acknowledging that unemployment is a problem that demands a policy response.
The first scheme envisages payment of one month’s wage, capped at ₹15,000, over three instalments to a first-time employee. This subsidy, by reducing wage costs, hopes to shift employer preferences to labour over capital. But there’s another catch: employees will get the second instalment only after completing an online financial literacy course.
There is no clarity on which course: will it be an existing one, like the one offered by the National Institute of Securities Markets (NISM), or will a new course be developed? It is also unclear who will develop and roll it out. The NISM course is conducted entirely in English and could be a barrier for many entry-level employees.
Then, the onus placed on employers to deter staff turnover—they have to refund the subsidy if an employee leaves before 12 months—is likely to act as a disincentive, even if it is designed to discourage firms from gaming the system.
There are other implementation issues. Success will depend on how the bureaucracy designs the scheme’s nuts-and-bolts, rolls it out and monitors its micro-level performance, which includes, among other things, on-boarding companies and tracking subsidy payments.
On the flip side, it will increase the compliance burden for many companies, with their human resources departments forced to liaise with government departments, apart from having to submit to audits and scrutiny. ‘Smooth’ is not the word that comes to mind while envisioning how it will work.
Apart from execution issues, a broader question needs to be asked: whether unemployment in India is a structural issue or if this kind of a scheme is enough to sort out the problem.
The government’s budgetary response might achieve limited success in the short term, but there is no certainty that it can deal with the larger problem of stagnant aggregate demand and hesitant corporate investment. The scheme has a medium-term tenure and only time will tell how it fares.
Even the strategy adopted for dealing with MSME stress misses the woods for the trees: it doesn’t try to get to the root of the problem. A new mechanism mandates banks to keep supplying credit even to MSME units displaying repayment stress, with a guarantee from a government-run fund supporting credit availability.
Apart from implementation issues over guarantee issuances, this is likely to generate an entirely new category of disguised bad loans, adding to the fog that envelopes the 2021 scheme of a pre-packaged insolvency resolution process which took resolution outside the formal platform. Apart from adding to financial instability, the scheme could have a major unintended consequence: banks might become MSME averse.
Most MSMEs in India are tied umbilically to large corporations as suppliers. It is common knowledge that large companies routinely delay supplier payments to reduce working capital costs. Ideally, the budget should have tried addressing the lax payment culture in large organizations.
The attempt to use market-driven platforms, such as the Trade Receivables Discounting System, certainly helps. But it not only excludes many smaller MSMEs, privacy concerns have also forced many large firms to settle invoices outside the system.
It is not known whether finance ministry officials still field numerous questions about the budget’s inflationary impact. But the budget, or fiscal policy, does have an impact on monetary policy.
A lot will depend on whether the funds allocated for food security can counterbalance the budget’s demand-generating measures and whether the eventual outcome will be softer consumer prices. The Reserve Bank of India’s dance steps will now be observed closely, both on MSME-related financial stability issues and how it responds to the budget’s inflationary impact.
