What Modi sarkar must do to make Budget 2016 a success

Budget 2016 was presented amid an economic situation characterised by external uncertainty, both downside (low global growth) and upside (low oil and commodity prices), low domestic demand in relation to installed manufacturing capacity, high level of NPAs of banks, primarily PSU banks, stressed balance sheets of corporates - together leading to low private investments.

Additionally, at seven per cent plus GDP growth rate, many experts believed that the economy was performing well below its potential, and that increasing employment substantially would require still higher levels of growth. In this scenario, we need to reflect on the need for policy follow-up in several directions.

1. Comprehensive social welfare

The question of countercyclical policies to impart a Keynesian stimulus to the economy. While the budget hugely increased the provision for infrastructure - highways, rural roads, railways in particular, it is difficult, given project cycles, to significantly increase spending in the time-frame required for countercyclical policies. Developed economies in general, rely on the social welfare system - unemployment benefits in particular, to automatically scale income support to Keynesian requirements in real time. The scope for Keynesian stimulus in Budget 2016 arises primarily from the enhanced provision for MNREGA, as well as payments due to the Seventh Pay Commission award and OROP.

While MNREGA is intended to shore up rural incomes during periods of stress, we are still far away from a comprehensive social welfare regime. The key problem in India is that the vast majority of workers who lose their jobs during economic downturns are employed in the informal sector, and accessing these workers through a social security net would call for nifty safety-net building. A comprehensive social welfare regime would unify the current disjointed pension regime, and unemployment benefits, in a pay-asyou-go system that is not reliant on fiscal subsidies, and builds on the experience of other countries.

2. Healthcare

The question of health care reform. The budget announced a new insurance scheme for the poor for secondary and tertiary care, with an annual ceiling of Rs 1 lakh per household, and an additional Rs 30,000 for senior citizens. Not a moment too soon - costs of hospitalisation and medicines are a principal reason why families fall into poverty, and stay poor. However, medical insurance provision is bedeviled by two sources of failure - adverse selection, that is, the healthy will not buy insurance, which is remediable by universal enrolment in the target group, i.e. the poor.

However, moral hazard, that is, physicians have better information about diagnosis and treatment options than the patients, leads private profit-seeking providers to exploit the limits of insurance coverage. The question of moral hazard has been addressed successfully by several public health insurance schemes in developed countries, notably the NHS of the UK, leading to cost-minimisation, enabling coverage of catastrophic illness, and incentivising the provider to provide quality service and engage in preventive health practices. It would behoove the government to look closely at these models, before detailing the new health insurance scheme.

3. Clean energy

The question of energy and environmental transformation of the country. The enhanced cess of Rs 400 per tonne of coal translates to at least Rs 20,000 crore a year. However, although much of the investment for clean energy, and clean-up of polluted environments, is expected to be done by the private sector, most such projects are still unviable without some grant support.

The newly renamed Clean Environment Fund can be tapped for this. However, private players are clueless about how to access the money. The gatekeepers need to be moved out of the government, and into designated financial institutions that have the capacity to properly appraise such projects, and blend the grant support with their own commercial financing.