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- NDA government shifts stance: Budget pins hopes on financial sector changes to boost infrastructure investments
Finance minister Nirmala Sitharaman’s third Budget marks a shift in the economic stance of the NDA government. Designed in the backdrop of a pandemic induced contraction in national economic output, it marks a discernible shift towards experimenting with measures to boost economic growth through a push to build infrastructure. Budget details signal that the government expects to move out of crisis mode the next financial year by reallocating expenditure from emergency measures such as food relief to other priorities. In terms of ideological signalling, there’s a discernible shift towards privatisation and monetisation of assets to boost income. It’s a Budget with promise. But its impact will be influenced by the details, in particular how it fleshes out ideas to fund infrastructure development.
The Budget’s financial sector changes are linked to its aspirations on infrastructure development. The most significant change is the switch back to a development financial institution model backed by Rs 20,000 crore as government equity to catalyse infrastructure funding. The experience of relying on banks to do it has been disappointing. Banks are not yet out in the clear. Another important proposal is the announcement that the government will establish the equivalent of a ‘bad bank’ to handle bad loans on bank books. Both these moves hold promise. But everything hinges on the design of the institutions and attendant incentive structure. A related challenge will be staffing both these institutions with adequately skilled people. Design of other structures will play an equally important role in other infrastructure proposals. The Budget pins its hopes on the government attracting private finance in areas such as public bus transport services and the 8,500 km of road projects to be awarded in 2021-22. Budgets in recent times have been built on the same foundation, but struggled to attract enough private investment. Therefore, details fleshing out the key ideas will be key.
The Budget math is interesting. The total expenditure for 2021-22 is expected to be Rs 34.83 lakh crore, marginally higher than the Rs 34.50 lakh crore that the FM said will be spent in the current financial year after the stimulus packages. The highlight of next year’s spending will be a sharp 43% reduction in subsidies to Rs 3.69 lakh crore. The reduction is on account of a large roll back of the food subsidy bill which expanded hugely after the lockdown was imposed. The money has been reallocated to a one-time expenditure on vaccination, Jal Jeevan Mission and a new phase of the programme to enhance nutrition. The efficacy of many of these programmes will depend on the states who handle the last mile. The current Budget marks the start of the 15th Finance Commission recommendations which have created space for the Centre to create a non-lapsable fund for acquisition of defence equipment. This is a far-reaching recommendation, with its impact spread over time.
The other highlight of the spending programme is that the government plans to enhance budgetary support for capital expenditure in 2021-22 to Rs 5.54 lakh crore, higher by 26.19% over the revised expenditure for the current year. On the revenue side, tax receipts are expected to bounce back in 2021-22 as the nominal GDP is forecast to grow 14.4% to Rs 222.87 lakh crore. The highlight however is the expected growth in disinvestment proceeds to Rs 1.75 lakh crore from the Rs 32,000 crore expected this year. Some of the receipts will represent ongoing privatisation exercises such as Air India’s sale. But this source of revenue may be more durable because the Budget signalled a decisive change by indicating a couple of public sector banks and one general insurer may be privatised. In terms of signalling, this is significant.
Fiscal deficit for the current financial year is expected to be 9.5% of GDP, which the government aims to lower to 6.8% in 2021-22. Given the extraordinary situation, the overrun in fiscal deficit by 6 percentage points is understandable. Further, no fiscal projections have been made till 2023-24 as the Finance Commission recommendations have altered some scenarios. It’s a Budget without any big surprises on the tax front, and one that holds potential in changing infrastructure financing in India. That potential needs to be actualised in the days to come.
- Sitharaman’s infra push: Done right, it could prove transformational in post Covid era
Among the top features of Budget 2021 that are being welcomed, is its infra push. Particularly with investment by private firms being low, there is broad consensus that this is absolutely the time for public investment to deliver a bigger bang for the buck. Accordingly finance minister Nirmala Sitharaman not only announced specific projects such as highway infrastructure targets for the poll bound states of Assam, Kerala, Tamil Nadu and West Bengal, and a sharp increase in capital expenditure at Rs 5.54 lakh crore from Rs 4.39 lakh crore, but also a Rs 20,000 crore capital outlay for a professionally managed Development Finance Institution.
Critical infra projects are capital intensive but the economic slowdown has multiplied private capital’s hesitations, which is why the government is setting up such a public institution once again, to act as an enabler and catalyst for long-term and much larger infra financing. Towards this end a bill is expected to be introduced in the ongoing Parliament session itself. It will of course all come down to how professionally the Development Finance Institution is managed but there can be no overstating how much is riding on its success. Well executed projects have the potential to prove transformational in the post Covid era, particularly as the infrastructure deficit from transportation to power has hobbled India’s manufacturing competitiveness and overall growth.
3.Getting back on track: on Union Budget 2021
In times that call for deft stewardship of the economy, this year’s Budget is a starting point
Finance Minister Nirmala Sitharaman made a brave effort to make good use of the lessons learnt from the unprecedented global health crisis and ensuing economic setback to put lives and livelihoods back on track. There is greater spending on health care and some fiscal push to undergird the struggling demand in the pandemic-hit economy. But this is no transformative budget that lives up to the heightened expectations of a weary population waiting for manna from the government. A lot more could have been done to address the chronic underinvestment in India’s public health infrastructure by appreciably raising expenditure. The Union Budget for 2021-2022 presented to Parliament on Monday, instead reveals an estimated health outlay of ₹74,602 crore, almost 10% lower than the revised estimate of ₹82,445 crore earmarked for health spending in the current fiscal year. The Minister, however, has claimed a 137% increase in the budgetary outlay on ‘health and wellbeing’ by including a one-time expenditure of ₹35,000 crore set aside for the COVID-19 vaccination programme, ₹60,030 crore budgeted for the department of drinking water and sanitation, as well as the Finance Commission’s grants for both water and sanitation and health totalling to almost ₹50,000 crore. While it is an inarguable fact that the availability of vaccines, ensuring universal access to safe drinking water and proper sanitation and adequate nutrition are all key in determining a population’s wellbeing, an abiding thrust on creating and maintaining a sizeably more extensive public health infrastructure needed a substantially higher outlay on the standalone head. In fact, the Economic Survey had eloquently made the case for providing a massive boost to health spending, which it reasoned would serve as a direct means to raising overall economic output by reducing the economic burden of illnesses. To her credit, the Minister did announce that the government intends to introduce a new centrally sponsored scheme, ‘PM Atma Nirbhar Swasth Bharat Yojana’, to develop primary, secondary, and tertiary care capacities over the next six years, at an estimated cost of ₹64,180 crore. How exactly this scheme pans out in terms of strengthening the beleaguered public health infrastructure in the remote and far-flung corners could well determine how prepared India is for the next unforeseen health emergency. A sizeable fiscal stimulus to reinvigorate consumption demand could have gone a long way in completing the recovery. While the revised estimates for the current financial year project a fiscal deficit of 9.5% of GDP on account of expenditure surging to ₹34.50-lakh crore, the Minister has opted for a mere ₹33,000 crore increase in the overall expenditure outlay in her Budget estimates for the next fiscal. Here again, she has pointed to the ₹5.54-lakh crore set aside for capital expenditure to contend a 34.5% increase in outlay over the current year’s Budget estimate. Far from being an expansionary Budget, Ms. Sitharaman has opted to contain overall spending so as to rein in the fiscal deficit to 6.8% in the coming fiscal itself. The country cannot afford a premature scaling down of fiscal support at a time of rising inequality.
Strapped as the government is for funds in the wake of this year’s economic contraction denting its revenue receipts, the Budget does make bold to set out a few avenues for resource mobilisation. With the Minister announcing her resolve to complete the pandemic-delayed strategic stake sale in several state-owned companies in the coming fiscal, the Budget has accounted for ₹1.75-lakh crore in capital receipts from disinvestment. She also proposes to privatise two more public sector banks and a general insurer in 2021-22 and has committed to ensuring that the necessary legislative amendments to enable the LIC’s IPO are introduced in the current session of Parliament. The Budget also throws open the doors for increased FDI in insurance — the foreign ownership limit would be raised to 74% after amendments to the Insurance Act, 1938. Still, it remains to be seen how eager overseas insurers may be to raise their stakes, given the government’s intention to make its proposal politically acceptable by including safeguards such as mandating that a majority of board positions and key management personnel be restricted to resident Indians and requiring the companies to set aside a specified percentage of profits as general reserve. Also on the block for possible sale or lease through concessions are state-owned undertakings’ land assets that the government intends to monetise. In finding the capital for its National Infrastructure Pipeline, the Budget proposes an asset monetisation pipeline that would include highways, airports and ports. The aggressive stance on privatisation notwithstanding, the government is still likely to face an uphill task in achieving its ambitious disinvestment goal given that private investment is still anaemic. Ms. Sitharaman has also embarked on creating a ‘bad bank’ for dealing with the pile of stressed and bad bank loans. The Budget proposes establishing both an Asset Reconstruction Company and an Asset Management Company that would consolidate and take over existing stressed debt and then help dispose of the assets. It is these plans to privatise two state-run banks and also undertake a clean up of the stressed assets that have prompted the Minister to set aside just ₹20,000 crore to recapitalise the remaining public banks. Ultimately though, given its effort to mobilise resources without tweaking direct taxes at a time when several States are headed to the polls, the government has had little option but to tap the market for debt. With the Budget positing a gross market borrowing of ₹12-lakh crore, the government will end up getting 36 paise of every rupee it nets from borrowings and other liabilities, an 80% increase. Given these challenges, the Budget can only be the starting point for a year that calls for deft stewardship of the economy.
4. Growth with inequality: On Economic Survey 2021
The Economic Survey seems to privilege wealth creation over reduction of income disparity
The Economic Survey for 2020-21 is an expansive attempt at reviewing the developments in the Indian economy during the current financial year and providing an outlook for its near-term prospects. Spread over 700 pages, the survey opts for a self-congratulatory tone while highlighting the policy achievements of the government in steering the economy through the treacherous shoals of “the most unfathomable global health emergency experienced in modern history”. Citing an approach that used ‘graded public health measures to transform the short-term trade-off between lives and livelihoods into a win-win that would save both lives and livelihoods over the longer term’, the survey asserts that India established a globally unique model of strategic policymaking in containing the COVID-19 pandemic while helping the economy recover quickly from its deleterious impact. There is no denying that the country appears to have not only flattened the curve but also, crucially, so far avoided a bruising second wave of infections seen in much of Europe and the U.S. While it may be debatable as to how much of the turn in the pandemic’s progress could be attributed wholly to proactive policy measures, the survey’s contention that India has turned the crisis into an opportunity to strengthen its long-term growth potential through ‘seminal reforms’ sounds off-key, especially given the ongoing farmers’ agitation against the new farm laws as well as the plight of the struggling small and medium-scale industries and informal sectors.
The survey goes on to forecast that the economy is currently experiencing a V-shaped recovery that would enable GDP to expand, even by a ‘conservative estimate’, by 11% in real terms in 2021-22. Still, to achieve that level of real growth, retail inflation must moderate substantially to average 4.4% or less over the 12-month period through March 2022, given that the survey has projected nominal growth at 15.4%. Also, while batting for a fiscal push to support the reviving economy, it posits an upside to the growth prognosis predicated on, among other factors, a rapid roll-out of the COVID-19 vaccines and a recovery in demand in the battered services sector. However, the document fails in providing an honest assessment of the on-ground economic situation by overlooking key aspects including the extent of unemployment even as it hints at the level of rural joblessness, which followed the return of millions of urban casual workers in the wake of last year’s hastily implemented lockdown. This it does by taking credit for a record 311.92 crore person-days of work generated over the last 10 months under MGNREGA. And in contending that growth should be prioritised over inequality in tackling poverty, when the pandemic has exacerbated the gap between the rich and the poor and the Finance Minister is set to present her Budget, the survey seems to privilege wealth creation over all else.
5.What Union Budget 2021-2022 gets right | HT Editorial
There were no unpleasant surprises in Union Budget 2021-22, and that was the biggest surprise. There was no new Covid tax, no wealth tax, no super-rich tax, no levy of the kind that made markets edgy in the run-up to February 1. Budgets are about headline management, effective implementation, and outcomes. Purists give the three equal weightage, but in the popular reckoning, budgets get remembered for the first more than anything else. And by steering clear of these fears, by not changing the income tax regime, and by focusing on health and infrastructure, this budget has managed the headlines well. Sure, there was the matter of the agri-cess (which will actually not mean an increase in price for either the importer or the end-user), and an increase in some import levies in the spirit of Atmanirbharta (self-reliance), but on almost every critical parameter, Union Budget 2021-22 ticked the right boxes.
On health, it announced a six-year plan, costing ₹64,180 crore to strengthen the country’s health infrastructure — evidence that India has learnt its lessons from the pandemic. On government spending, the budget has increased allocation to capital expenditure by over a third, even as the overall number remains the same as in the revised estimates for 2020-21 (which are anyway higher than the budget estimates for the year, on account of the pandemic). There may be some quibbling about this because it means operating expenditure across several government departments, and on select welfare schemes, will come down from highs seen during the pandemic. But this is in keeping with both life and the economy returning to the pre-pandemic normal. Capital expenditure is generally considered more productive — and should result both in an increase in demand and help create more jobs.
On the fiscal deficit, the budget has taken the long view (and the correct one, in this newspaper’s perspective), with the government giving itself the leeway to spend more even as it has defined a gradual (and achievable) glide path. India is expected to end 2020-21 with a fiscal deficit of 9.5%, 2021-22 with 6.8%, and has targeted a deficit of 4.5% by 2025-26. On the reforms front, the budget has announced the privatisation of two State-owned banks, and increased the permissible foreign direct investment in insurance companies to 74% from the existing 49%, with some caveats. In a country that nationalised banks, the first is a radical, if unexpected move — it isn’t done yet, but even the announcement of intent is very significant. And on the compliance front, the reduction in the time-frame for reopening IT assessments, from six to three, is as welcome as the decision that removes the requirement for people over 75 to file IT returns if their income comes from pension and interest.
The numbers behind Union Budget 2021-22 appear pragmatic, and, most importantly, believable. The budget has assumed a 14.4% nominal growth in Gross Domestic Product (GDP), lower than the Economic Survey’s 15.4%. This means that if the actual nominal growth is closer to the predictions of the Economic Survey, the fiscal deficit could be lower. Union Budget 2021-22 assumes a tax revenue of ₹15.45 lakh crore, lower than the current year’s budget estimates of ₹16.35 lakh crore (revised estimates: ₹13.44 lakh crore). The corresponding figure for 2019-20 was ₹13.56 lakh crore. It is even more pragmatic when it comes to non-tax revenue. It has assumed a non-tax revenue of ₹2.4 lakh crore, lower than this year’s budget estimate of ₹3.8 lakh crore (revised estimate: ₹2.1 lakh crore) and also 2019-20’s ₹3.2 lakh crore. There is no reason to doubt any of these numbers — especially in the context of the sequential recovery underway, evident in a clutch of high-frequency indicators, from the Purchasing Managers Index (January’s 57.7 is a three-month high) to monthly car sales. There are other interesting aspects about the government’s planned revenue gathering efforts – from an initial public offering for the Life Insurance Corporation to the monetisation of land owned by the government and State-owned companies, but these are clearly work-in-progress; revenue from these has not been factored into the budget.
If there is one thing budget 2021-22 can be faulted for, it is the absence of any direct measures to drive demand, although there are enough indirect ones. Still, given everything else in the budget, and the fact that a 14.4% nominal growth suggests a substantial recovery in demand, no one is likely to complain about it too much.