Union Budget 2021: Budget signals reform, implementation will be key

Indian Union Budget 2021-22: After the immediate euphoria and mayhem in the market has settled down, it is opportune to examine the budget from its macroeconomic and growth implications. Expectedly, given the sharp contraction in the economy, growth is the focus, and considering the fact that private investment continues to be subdued, the only way is for the government to undertake the heavy lifting. At the same time, it is important not to jeopardise the future, as ultimately the accumulation of debt can be a drag. A fine balance has to be struck to ensure that more allocations are made to the sectors with high fiscal multipliers and high employment intensity. The FM had promised to deliver a “never seen before” budget and expectations were naturally high.

The Economic Survey, presented on January 29, made an impassioned plea increasing public expenditures substantially. The countercyclical fiscal policy in the period of unprecedented slow down requires loosening the purse strings. The Survey argued that outstanding debt does not increase when the nominal growth rate exceeds the rate of interest paid by the government. Of course, this may not happen when the primary deficit is very high, and therefore, eventually, that has to be brought down to achieve consolidation. The Survey also argues that increasing public investment expenditures on sectors with high fiscal multipliers would crowd in private investments and revive animal spirits to reverse the declining trend in capital formation. The government should not hold back for fear of sovereign rating agencies for (i) ratings do not reflect the fundamentals; (ii) what matters is the ability and willingness to service the debt.

The revised estimates of fiscal numbers for FY21 show that the budget presented last year was rendered completely irrelevant because of the pandemic. It is seen that the revised estimate of tax revenue for the year is lower than the budget estimate by 17.8% and the shortfall in total revenue is 23%. In contrast, expenditures had to be increased more than the budgeted amount by 13.4%. The increase in revenue expenditure is 14.5%, and capital expenditures are higher by 6.1%. Consequently, the estimated fiscal deficit is 9.5% of GDP as against the budgeted 3.8%. This is much higher than expected, partly because expenditures were increased after October. The concern is that the revenue deficit for the year is 7.5% and the primary deficit is 5.9%–both are very high. While the cry for increased spending is real, the lurking dangers of unproductive spending should not be lost sight of.

The budgeted fiscal deficit for 2021-22 too remains elevated at 6.8%. Even with the expectation of increased revenue collections by 15%, and the disinvestment target pegged at Rs 1.75 lakh crore, the total expenditure increase for FY22 is budgeted at less than 1% from the revised estimate of FY21. While the revenue expenditure is estimated to decline by 2.7%, the capital expenditure growth is pegged higher at 26.2%. As a ratio of GDP, the expenditure is estimated to decline from 17.7% in the current year to 16.6% in the next year. The fiscal deficit is budgeted at 6.8% of GDP and 75% of this, or 5.1% of GDP goes to finance revenue expenditures; the primary deficit is estimated to be 3.1%.

Thankfully, the FM has promised greater transparency and brings in all off-budget liabilities into the budget.
The FM has placed the six pillars namely (i) health and wellbeing; (ii) physical, financial capital and infrastructure; (inclusive development and aspirational India; (iv) reinvigorating human capital; (v) innovation and R&D; (vi) minimum government and maximum governance. Under each of them, a number of proposals have been presented, and it remains to be seen how many of them will be effectively implemented.

Predictably, on the health sector, the budget makes higher allocation and creates a new Centrally Sponsored Scheme in addition to the existing National Health Mission. The budget speech states that Rs 64,180 crore will be allocated to the new scheme in six years. In any case, healthcare is a state subject; an overwhelming proportion of spending on health has to come from states. The fifteenth finance commission has mandated that the states should spend at least 8% of their budget on healthcare. Surprisingly, the defence sector does not get much additional funding, and the allocation, including capital expenditures (excluding defence pensions), remains at about 1.81% of GDP.

The most important part of the budget is the reform signals it emits. As expected, the government proposes creating an Asset Restructuring Company to purchase the banks’ bad assets to free them from bad debt and start lending. This is supposed to ease the requirement to recapitalise banks. Its success depends on how professionally it is run and how expeditiously and effectively it can resolve and recover loans. Besides, it is necessary to address why these bad assets have accumulated in the first place to prevent pushing the problem to the new company from time to time. The government has also announced the privatisation of two PSBs and a host of other companies, and disinvestment in strategic sectors. Allowing higher FDI in general insurance up to 74% is also on similar lines. Another important initiative is the creation of the Alternative Investment Fund. This is necessary to avoid a continued mismatch between liabilities and assets of commercial banks. Ideally, a vibrant corporate bond market is needed, but that is not likely to happen in the near term.

These are important announcements, but where we, as a country, fail, is implementation. We have seen the most important reform initiated in 2016—the implementation of insolvency and bankruptcy code being effectively gamed by the lenders and the promoters to make it substantially ineffective. It is important to put enough checks and balances against such gaming and make it effective for expeditious resolution. This is particularly important now for, when the regulatory forbearance ends, there could be a spate of bankruptcies and kicking the can down the road can create intractable problems.

Unfortunately, the protectionist trend started by the government four years ago continues, which does not help the country to join the global supply chains and increase exports in the medium- and long-term. We seem to have fallen into a dependence on import substitution in the name of self-reliance. The budget seeks to remove exemptions on a number of items and increases rates on some others. It has also stated that it will review the exemptions of over 400 items in the course of time. There is a broad-based infrastructure cess as well. This is really worrisome

Author was the Member of Fourteenth Finance Commission and former Director, NIPFP
Views are personal