As a father, I would work with my worst enemy to ensure a better future for my little one – Buck in Ice Age: Collision Course (https://www.youtube.com/watch?v=ZL9-pvptjzM).
It is strange to start a narrative on the 2021 union budget with a reference to an animated film. And not one of the popular ones either. But these are strange times.
Before we look forward, let’s look back and trace where we came from so we know where we are going.
At the beginning of 2020, the world was figuring out how to cope with conflicts of our own making—wars, protests, terrorism—when an invisible germ came along and reshuffled the deck. Today, the most confounding variable globally is the inability to predict behaviour of individuals, institutions, companies and countries.
Yet, we have to move on.
Move on to things that happen every year. Because there is comfort in the routine.
And like every year, people will tune their TVs to Doordarshan (or its YouTube counterpart) to watch the budget. One of the key messages that people glued to their screens will want to take away is on jobs. How will the finance minister create more jobs, and where does she plan to get the money to spend so that job creation becomes a reality.
When Nirmala Sitharaman presents this year’s budget on February 1, experts will be observing intently to see if she can come up with innovative ways to boost the economy. Most of 2020 was spent sheltering in place. Lockdowns meant revenues plummeted, while expenses skyrocketed. The government, for its part, borrowed from the market but that meant India’s debt to GDP ratio shot up. Some expect it to top 85% by the end of the year from around 68% in March 2020. We would only really know after the budget.
The debt to GDP ratio is an important number. If this ratio remains elevated for a long period of time, it can lead to an economic slowdown because it also determines a government’s ability to spend. Higher the ratio, less possible the spending as it would scare lenders.
Let us explain. In a booming economy, citizens earn more, spend more and pay more taxes. This means more revenue for the government. This revenue is used to build infrastructure, create job opportunities and service debt. The more the GDP grows, the more the government’s ability to raise and service debt.
If the public debt is high as a proportion to the GDP, then when the growth slows, and government revenue shrinks, debt servicing becomes a huge expenditure. This leads to lesser spends on growth drivers such as jobs and infrastructure. A World Bank study has estimated that in emerging market economies, every percentage point rise in public debt beyond 64% costs 0.02 percentage points in annual growth.
There are risks. The World Economic Forum’s Global Risk Report 2021 says:
“[a] doubly disrupted generation of youth is emerging in an age of lost opportunity… While the digital leap forward unlocked opportunities for some youth, many are now entering the workforce in an employment ice age. Young adults worldwide are experiencing their second major global crisis in a decade. Already exposed to environmental degradation, the consequences of the financial crisis, rising inequality, and disruption from industrial transformation, this generation faces serious challenges to their education, economic prospects and mental health.”
These are strong words. And few countries are as up close to this risk as India. A 10-year window of opportunity to harvest the demographic dividend is shutting quickly. The reason? India is slowly getting older. According to reports, the population of India’s youth (aged under 29) will drop by 8.9 million between 2020 and 2030. While those over the age of 30 years will increase by 138.7 million.
But things can change. And ambitious ideas are where it all starts. For instance, India can start building new centres of economic development in Uttar Pradesh or Madhya Pradesh. These two states are of particular importance. Indian cities account for 63% of the country’s GDP but all the major growth centres are in the west or south. Delhi (and by extension Noida and Gurgaon) is the lone shining light in the north. Airports, a good indicator, paint a clearer picture. The tiny sliver of Kerala in the south with a population of 3.5 crore has four international airports while Uttar Pradesh with a population more than Germany, France and England put together has just two.
But now is the time for something new. A time to take risks. A time to be bold. A lot of hope rests on Sitharaman. Her unopened bahi-khata holds a lot of promise.
We will be following the finance minister closely. On our social media channels, we will explain and breakdown what she says so nothing you care about is missed. Give us a follow if you don’t already and turn on notifications.