This year’s Budget is of exceptional significance and one of India’s most awaited events recovering from the pandemic. The Covid-pandemic has changed the needs and expectations of Indians and makes this Budget entirely different. The public was keen to look at the extent of policy support, relief brought in by the Government, and the reforms that would be a pathway to rebuilding and revival.
Let us examine how this Budget strategically focuses on post-Covid recovery, sets future directions, and attempts to provide a path for the next decade.
Among many things the transparency in fiscal numbers is the first thing that this Budget does right. It honestly recognizes the fiscal deficit as the challenge to growth as the Government adopts a bold gradual fiscal consolidation path. The deficit in the current financial year is at a shocking 9.5% (rather than widely predicted 6-7%), 6.8% in the next financial year, and it gradually moderates to 4.5 over the next few years. This gradual moderation in the fiscal deficit is bold and commendable.
What is even better is that these numbers have taken into account all the off-Budget items. The Government decided to make a virtue of necessity by using the pandemic’s extraordinary situation to bring back all the extra-budgetary borrowings into the Budget.
The Government abandoned the old 3% fiscal target opting for much higher deficit risks, higher inflation, and interest rates in the push for growth. The Government has bought itself time to ramp up schemes that boost medium-term growth. Of course, these numbers cannot sustain forever and must fall. However, a higher fiscal deficit idea was also deliberated in the G20 in 2020 and is in tune with global trends. Economy after economy will follow.
Most political analysts thought the Government would go slow on further economic reforms, but the significant push towards major infrastructure development indicates an unwavering willingness to big and purposeful spending. The Government is keen on building capital.
Budget 2021 sees a 34.5 percent increase in capital expenditure to Rs. 5.54 Trillion, with an additional Rs. 2 Trillion for states and autonomous bodies. The stress on capital and infrastructure (Roads – Rs. 1Trillion, Railways – Rs. 1Trillion) hints at the focus on revival and growth. The money utilized to create assets will certainly catalyze future growth.
It is a good start but needs to be kept up year after year. What gives us confidence is that this Budget also locks the next few Union Budgets to similar spending. The Rs.3 Trillion outlay in power distribution, for instance, is spread over five years. It suggests the Govt. is viewing infrastructure investment as a concurrent, systematic investment plan.
The Government’s intent to monetize its holdings, pursue privatization, and strategic disinvestment bode well. The Budget commits the Government to move ahead with the privatization of companies already put on the block (BPCL, Air India, Shipping Corporation, etc.). Additionally, it boldly doubles up by adding two banks and one general insurance company to the list.
Great intent, but we shall remain skeptical of the execution. The impact of the Rs 1.75 lakh crore divestment target depends on actual privatization, not just promises and sales needs to begin from the very start of the next financial year. Apart from this, the Budget also proposes to bring out the IPO of LIC that will deepen capital markets when it enters the Sensex after listing.
These are bold steps in the context of India’s political economy. However, it seems the Government is opening another door on the labor union side. One can expect the trade unions to come on the street and accuse the Govt. of a sell-out to big business. But then it only shows Prime Minister’s conviction to bring in economic reforms, whatever be the price.
If the Govt can achieve it within two financial years, it should be a significant accomplishment that would lead to substantial economic and efficiency gains.
Health is Wealth:
Health and well-being are given top priority underline its importance, especially in a pandemic-hit world. Making a virtue of necessity, the Government uses the Covid crisis to boost health spending by more than two-fold, from around Rs 94,000 crore in the budget estimate last year to nearly Rs 224,000 crore next year.
The Govt. has to ensure that the spending does not taper off once the pandemic is over. Increased health spending is a desirable long-term goal. The immediate goal has to be vaccinating the population as fast as possible. Quick vaccination will reduce the fear of Covid, reviving hard-hit sectors like travel, entertainment, and tourism. This ending of fear will stimulate the economy more than anything the Budget’s proposals can do. Conceptualized in an integrated manner, this can have enormous socioeconomic consequences.
Recapitalization of Banks:
The privatization could combine with the Bad Bank announcement, higher foreign investment limit (74%) in the insurance sector, and a new development financial institution (DFI).
The most significant blockbuster measure will prove to be the cleaning up of Banking Balance Sheets. It will add to Banks’ firepower to finance the investment cycle and support the animal spirits of Corporate and Small Entrepreneurs of India. Growth requires a lending spurt. Such a proposal for the Bad-Bank to take NPAs off the banks’ books will provide immediate relief to the banks.
The creation of the new DFI indicates that the Govt. is conscious of the financial system’s shortage of capacity. In most countries, the bond market provides long-term finance. Whether creating the DFI will do the same in India is uncertain.
Tax Policy Consistency:
With so much pressure on public finances, the easiest target would have been to raise taxes. However, contrary to many economists’ commentaries, the Govt. resisted the temptation to levy a COVID-Tax. There are no new taxes, neither there is wealth tax or any additional surcharges.
It is a known fact that such levies do not yield much income and instead hurt investment and consumer sentiment. Destroying growth prospects with new taxes would have diluted entrepreneurial enthusiasm and India’s emerging policy consistency brand. The Govt. deserves to be commended for this.
Ease of compliance:
The challenge is to sustain the high growth rate that looks far more likely to come India’s way than not. That requires removing the heavy regulatory hand from the shoulders of Indian businesses, big or small. The continued focus on tax reform is much beyond money. High taxes hurt. But when you combine them with complex compliances, it hurts even more. The Govt. has focused on easing compliances. Reduction of opening past cases to three years, citizens above the age of 75, to not have to file income tax returns if their income is only from pension and interest. At the company level, faceless Tribunal Centre are welcome moves in that direction.
Reliance on Private Sector:
The Production-Linked Incentive (PLI) schemes (to cost Rs. 1.95 Trillion over the next five years) also reaffirms the Government’s growth focus. The Government’s willingness to give firms monetary incentives for meeting production targets is unprecedented and promises a significant boost to investment sentiments and will incentivize domestic production capabilities.
The Principal Economic Advisor Sanjeev Sanyal reiterated the country’s economic model under the present Government, which is about getting the private sector innovation and investment going. “The focus is to encourage start-ups and innovation. Though the time is right to ramp up heavy infrastructure spending, ultimately, in the long run, India depends on getting the animal spirit of the private sector going,” he said.
For announcements to become accomplishments, one needs execution. Execution requires political will and stamina, and in today’s India, there’s no dearth of it. Or why would the bulls jump over the moon? In 2 trading days post-budget, both Sensex and Nifty have gone up 7.5% is a clear Thumbs Up from the market.
Jobs remain the challenge No 1. for any economy, any Govt. It has not been addressed directly. The assumption is that the revival of growth will, in itself, help restore job growth. Once the spending begins, it will take many private companies to start their investment plans around it. These converge at a single political economy statistic: jobs and more jobs in the urban cities. It may happen in the short term, but the long-term structural problem of the economy’s low employment elasticity, especially in the rural areas, remains.
The focus on inclusive development reflects the importance given to the vulnerable during Covid. The bold lockdown decision was accompanied by extensive social support measures, targeted economic packages, immediate relief by providing food rations, and a rapid expansion of health infrastructure. The approach was to keep the policies people-centric. The food subsidy bill is Rs 3 trillion higher than initially budgeted. Of the rest, rural development, including MNREGA, fertilizer subsidies (arrears are to be cleared), and roads account for most of the increase.
The Budget tells us that India has reached a mature phase of its policymaking that is prudent, risk-taking, and ambitious. By committing to higher fiscal deficit targets and a longer, gradual path to fiscal consolidation and announcing several multi-year big spending programs, the Government has signaled its focus for growth.
The decisiveness of the Indian Government during Covid is now coming to fruition. Any death is a tragedy, but India’s fatality rate to Covid is amongst the lowest. No wonder after criticizing India for shutting down economic activity, today the rest of the world is following through… sadly after several deaths.
This Budget effectively shows that India doesn’t need to lean on what the Western nations are doing but rather carve its path to determine its role in the emerging global order and sets it for a renewed bull run.