Budget bets big on growth: FM squeezes subsidies, raises capex again

Union Finance Minister Nirmala Sitharaman began her speech outlining the Budget for 2021-22 by reiterating a simple fact: This Budget exercise was undertaken under circumstances never seen before. The unprecedented contraction of output and therefore of revenue has knocked India off its fiscal consolidation path. The Narendra Modi-led government, which has prided itself on its fiscal responsibility, will now be forced to amend the Fiscal Responsibility and Budget Management Act to take into account a fiscal deficit of 9.5 per cent of GDP during the pandemic year — which will only slowly be reduced, with a target of 6.8 per cent in the forthcoming financial year and eventually 4.5 per cent by 2025-26.

Braving the inevitable questions that will be asked by the bond markets and by rating agencies, the government has bet boldly on a growth revival providing India with favourable debt dynamics going forward. The deficit itself has been financed not just through an unprecedented expansion of market borrowing — which will be at Rs 9.6 trillion next year — but also through dipping heavily into the pool of small savings to the tune of almost Rs 48,000 crore over 2020-21 and about Rs 40,000 crore in 2021-22. These are not low-cost sources of financing, which undermines the claims of a favourable growth-driven debt dynamic. But the FM has also used the opportunity to improve the quality of fiscal consolidation, if not the quantity. A project started last year to increase the transparency of Union government borrowings has been brought to fruition, with below-the-line borrowing reduced to just Rs 30,000 crore, according to the Budget speech.

The Food Corporation of India, for example — and therefore food subsidies — will have to be funded transparently henceforth. But food subsidy — indeed, most subsidies — have been crunched in the government’s projections for the forthcoming year. By no means is this is a stimulus Budget. Revenue expenditure net of interest payments will in fact be reduced in 2021-22 by 8.6 per cent compared to the revised estimates for 2020-21. Subsidy allocations across the board have been slashed by 30 to 60 per cent — for food subsidy, for fertiliser subsidy, for the rural employment guarantee scheme, and for LPG. This is where pressure on the Budget numbers will be apparent in the coming year.

By contrast, the government has maintained its commitment to India’s infrastructure rollout. Gross budgetary support for capital expenditure will go up over the revised estimate by over a quarter — the second time in as many years that Sitharaman has doubled down on investment in difficult circumstances.

In addition, the Union government has once again made budgeting difficult for state governments. States have been given a much tighter fiscal trajectory, told to get to 3 per cent of SGDP by 2022-23.

The stock markets reacted positively, reflecting a series of moves that were viewed positively by the players, including a renewed commitment to disinvestment and tweaks to the tax code that might make mutual funds more attractive. Bank stocks soared, reflecting hopes that a ‘bad bank’ might deal with the bad-loans crisis, and that two public sector banks would finally be privatised.

The Union Budget’s focus on ensuring infrastructure-led growth was visible also in a slew of measures meant to create depth to the long-term capital markets.

In a big-bang announcement, the cap on foreign direct investment in the insurance sectors was finally raised above 50 per cent; it will not be 74 per cent, alongside some safeguards on board composition.

Asset monetisation was also promised, alongside the privatisation of two public sector banks — a big move. However, the disinvestment target was lowered to Rs 1.75 trillion after only about 15 per cent of last year’s target was met, in spite of a roaring stock market.

The transport sector was a special focus, with a budgetary allocation more than 50 per cent higher than the Actuals in the pre-pandemic year of 2019-20. Amid a general slashing of expenditure, two other sectors stood out as priorities for the government. The Jal Jeevan Mission, which aims to provide clean drinking water across the country, saw a nearly five-fold increase in its outlay to over Rs 50,000 crore. And, as may be considered appropriate given the pandemic, the finance minister said her allocation to the health sector would be increased by 118 per cent — including a jump in the outlay for drinking water and sanitation, but also Rs 30,000 crore set aside for the Covid-19 vaccination programme.

The power sector, which has sucked up considerable money and attention in recent years — including through the UDAY scheme, which had only a temporary effect on the sector’s financial health — was promised another bailout. The finance minister said that more than Rs 3 trillion would be given to discoms over the next five years in a “reform-based, result-linked” package. Another past promise was also resurrected, with the commitment that consumers would be given the option to choose their electricity provider. Such reforms have for two decades run up against discoms that are attached to their state-level monopolies.

Other reforms were also given broader scope. The government has already decriminalised several offences under the Companies Act, and the FM said this effort would now begin on the Limited Liability Partnership Act as well. Although there was no direct tax relief as such, the process of making it easier to deal with the taxman was continued. Faceless assessment and appeal will be enhanced by constructing a dispute resolution committee and a central appellate tribunal that would be faceless and remote as well. In addition, some fields on the tax form will be pre-filled using TDS and other data to make filing easier for taxpayers.

However, the government’s turn towards protectionism as part of its “self-reliance” paradigm continued with this Budget. The finance minister made a series of tweaks to the customs duty structure with the avowed intent of helping domestic manufacturing. Some were raised, such as on solar lanterns; some were decreased, such as on steel products, ostensibly to promote MSMEs.

She also promised to hold consultations to “review” as many as 400 existing Customs exemptions. This will create a great deal of uncertainty among investors and market participants. All new exemptions will also have a phase-out date of two years after their introduction.