Budget 2021: Need financial sector reforms; trade liberalisation is key, says Arvind Panagariya

Expectations from this year's budget are running high following comments from the finance minister Nirmala Sitharaman that it will be unlike any other in the past 100 years.

In a recent virtual meeting with the Prime Minister and Finance Minister, a group of economists including Arvind Panagariya, Rakesh Mohan and Arvind Virmani among others cautioned the government against premature fiscal tightening and called for a relaxation of the fiscal deficit limit starting the first of April.

In fact, in a recent blog post, Professor Panagariya has made four reforms suggestions, which he believes will make it a dream budget. Prominently, he makes a case for bank recapitalisation and privatisation. According to him, these measures combined with those already put in place, such as the labour codes and insolvency and bankruptcy code, will nearly guarantee double digit growth.

On privatising public sector banks Panagariya said, “What I am pitching right now for the government to proceed, let us say take the six smallest of these banks which account for only 15 percent of the banking assets in the public sector, I think that is where the government can start by privatising.”

On reforms, he said, “We need financial sector reforms, trade liberalisation is a very important key, also the reimbursement or refund of all indirect taxes is important.”

On raising tariffs, “If we are choosing between tariffs and subsidies, most certainly subsidy is less distorting. Tariffs clearly are the most distorting -so if that is the option you give me I will take that. Personally, I am not a big fan of subsidies either because we tend to substitute tariffs and these production subsidies for the genuine real reforms.”