CONTEXT:
Finance Minister proposed many new measures in the Budget 2021 to prop up the flagging economy amid the Covid-19 pandemic and boost spending across sectors.
With improving conditions in economy, the economics had simplified the budgetary choices. With the economy recovering and the equity market surging, taxes and privatisation would reasonably be expected to rise.
PAST CONDITION OF ECONOMY:
In the last two quarters, the economy has been recovering sharply and faster than suggested by official growth numbers.
According to the official year-ago growth numbers, the economy contracted 23.9 percent in the second quarter and 7.5 percent in the third quarter.
J.P. Morgan estimates suggest that, on a quarterly basis, India’s GDP plunged 25 percent in the second quarter of 2020 and grew 21.5 percent in the third quarter of the same fiscal year — a narrative markedly different from that portrayed by the official numbers.
Indeed, the economy is likely to have grown another 10.5 percent in the fourth and is expected to deliver a growth rate of negative 6.5 percent for the full fiscal year and then rise by 13.5 percent in FY 2022.
These full-year growth numbers are higher than the forecasts of both the government and the market consensus.
The budget balances the next quarter and quarter-century by continuing the structural transformation that catalyses higher productivity for India’s citizens, firms and regions and empowers them to take advantage of a global shift in economic gravity to Asia.
WHY THIS GROWTH?
India has managed to break the link between infection and mobility. If the vaccination rollout proceeds as anticipated, then mobility should normalise by mid-year without threatening a new wave of COVID-19 infections.
The second is the recent shift in the government’s fiscal stance. After delaying for nearly six months, the government began to speed up spending in September 2020.
The adage “live within one’s means” is good advice for individuals and governments alike, it is intended mostly as a medium-term principle.
Instead, a key objective of macroeconomic policy is to provide countercyclical support to an economy to dampen volatility in the short run.
Increasing spending when revenue is rising (presumably, because an economy is also growing) accentuates — rather than dampens — economic volatility. The boost from government spending was expected to be a key support to strengthen the recovery in FY2022.
The revenue increase could be used to reduce the deficit while keeping spending broadly at its current share of the Gross Domestic Product (GDP). This would allow spending to grow 17-18 percent, in line with the nominal GDP.
WHERE TO SPEND REVENUE AMOUNT?
For this year, the Budget pegged the deficit at 9.5 percent of GDP, much higher than market estimates of around 7 percent and a 5 percent-point rise over the previous year. But this is largely optical.
Instead of funding food procurement through off-balance-sheet borrowing by the Food Corporation of India (FCI), as has been the case in the last few years, this year’s Budget has rightly brought some of that spending back on its accounts. Excluding subsidies and interest payments, the increase in the deficit is just 2 percentage points of GDP.
For FY 2022, the Budget targets a deficit of 6.8 percent of GDP. Much of the heavy lifting in the 2.7 percentage points of GDP reduction is done by lower subsidies and higher privatisation.
Excluding subsidies and interest payments, the Budget targets a reduction of 0.5 percentage points of GDP in overall spending, with capital expenditure rising only 0.2 percentage points of GDP.
There is a welcome emphasis on public health, on improving the financing of infrastructure projects, and on privatising banks and insurance companies.
There was no clear statement in the budget on boosting employment, especially female employment, which has been falling over the last several years.
Infrastructure spending (which, not unsurprisingly, was targeted towards poll-bound states) might boost employment to a certain extent, but it is not clear that the increased outlay is sufficient to meet the massive employment challenge.
The budget should have shown how serious it was about inclusive growth by announcing direct cash support to informal workers, circular migrants, agricultural labour, in addition to steady in-kind food transfers from the overflowing coffers of the FCI by making PDS universal.
BUDGET 2021 PROPOSALS
Production-linked incentive (PLI) scheme push
The government aims to spend Rs 1.97 lakh crore on various PLI schemes over the next five years, from this fiscal year. This is in addition to the Rs 40,951 crore announced for the PLI for electronic manufacturing schemes.
WHY? To attract global players in the Indian manufacturing sector as the government is planning to offer plug-and-play infrastructure to the companies willing to come to India.
A new central healthcare scheme was announced to strengthen the country’s healthcare infrastructure over the next six years. The Pradhan Mantri Atma Nirbhar Swasthya Bharat Yojana, which will operate in addition to the existing National Health Mission, has been allocated around Rs 64,180 crore.
WHY? This scheme is expected to be used to develop capacities of primary, secondary and tertiary healthcare systems as well as existing national institutions over a period of six years.
It would be used towards creating new institutions to cater to the detection and cure of new and emerging diseases.
Investment on health in this budget has increased “substantially”, with a focus on strengthening preventive care, curative and well-being of the population.
Power push
The government has decided to create a framework to give consumers alternatives to choose from more than one power distribution company.
Why? It is aimed at offering competition at operator level and more choice to consumers. Targets better efficiency levels in the distribution sector.
Divestment push and Bad bank proposal
Strategic disinvestment of companies, including BPCL, Air India, Pawan Hans, IDBI Bank, Container Corporation of India, to be completed in 2021-22.
Bad Bank proposal: The government will set up an Asset Reconstruction and Management Company for Stressed Assets to take over bad loans. Alongside, a Rs 20,000-crore equity infusion has been announced for public sector banks.
Government will take up strategic sale of two public sector banks and one general insurance company along with completing the sale of BPCL, Concor, SCI, IDBI and BEML among others in 2021-22.
WHY? To strengthen the state-owned banks and hasten the process of clean up of their balance sheet. The divestments will help raise revenue for the government and is expected to improve efficiency and provide momentum to privatisation.
It’s more about the principle of separating the good from the bad. It’s about not wasting more good money on bad assets.
FDI limit hiked in insurance
Hike the FDI limit in Insurance from 49% to 74%. Majority directors on board and Key management personnels will be Indians.
WHY? To increase capital inflow in insurance companies and enhance their expansion and growth.
Development Financial Institution reborn
Due to lack of finance for infrastructure and long gestation projects, Budget has announced the setting up of a Development Financial Institution (DFI). The DFI will have statutory backing and Rs 27,000 crore capital.
WHAT WILL BE ITS FOCUS? The proposed DFI will be used to finance both social and economic infrastructure projects identified under the National Infrastructure Pipeline (NIP).
Scrapping policy
The government has introduced the scrapping policy to remove unfit vehicles on a voluntary basis. All private vehicles beyond 20 years and commercial vehicles older than 15 years old will have to undergo a fitness test.
WHY? The proposal is expected to offer a boost to the auto sector, both for commercial and private vehicles.
Bad debt resolution
The government plans to further strengthen the NCLT framework and continue with the e-court system for faster resolution of bad debts. A separate framework for MSMEs will also be made by the government.
WHY? With the government-imposed moratorium on admission of new cases likely to end by March 31, a number of MSMEs, which have not been able to earn enough during the fiscal are likely to be taken to insolvency by their creditors. The separate framework may help MSME owners avoid losing their company while continuing to pay the debt.
Gas transport
An independent gas transport system operator for booking and coordination to ensure for unbiased allocation of natural gas transportation capacity.
WHY? The government aims to address concerns of bias in the allocation of gas transportation capacity by players such as GAIL involved in both the supply and transportation of natural gas.
Ujjawala push
The extension of benefits of the Ujjawala scheme to an additional 1 crore people.
WHY? The scheme, which provides LPG connections with financial assistance from the central government and currently benefits 12 crore households, will be extended further to provide clean cheap cooking fuel.
Power sector push
Rs 3.60 lakh crore has been allocated towards launching a “revamped”, reforms-based, result-linked power distribution sector scheme.
A framework will also be put in place to give consumers alternatives to choose from more than one distribution company.
WHY? This comes amid “serious” concerns over the viability of power distribution companies (discoms) in the country. The scheme is expected to provide assistance to discoms for infrastructure creation tied to financial improvements, including prepaid smart metering, feeder separation and upgradation of systems.
Discoms across the country are monopolies, whether government or private. There is a need to provide a choice to the consumer.
Relief for gig workers
Social security benefits will be extended to gig and platform workers. Minimum wages will apply to all categories of workers and will be covered under ESIC.
This will impact around 15 million gig workers in India, in addition to online platform providers across sectors such as transportation (Uber and Ola), food delivery (Swiggy and Zomato), and the contract workers in IT and software firms.
IMPORTANCE: The economic survey had noted that India has become one of the largest markets for flexi-staffing in the world due to the wider adoption of e-commerce and online retailing. It had also said that the increasing role of the gig economy was evident through the significant growth of online retail businesses during the lockdown caused by Covid-19 pandemic.
Penion relief
The government has given relief measures for senior citizens by removing the need to file income tax returns for those aged over 75 years.
CONCLUSION:
Budget is constructive and has helped to allay fears of excessive fiscal tightening, it did not go far enough to mitigate the tail risk that the current economic recovery does not turn into a “dead cat bounce”.
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