Finance Minister, Nirmala Sitharaman, referred to the Covid-19 pandemic in 2020 as ‘sui generis’ (unique in itself), so is the budget she presented. Reading the budget for intent and not just for the measures that it talks about, this is a reformist budget, in context of the structural reforms already undertaken by the Government such as Labour code, Farm Laws and PLI schemes.
The Budget marks a key shift in Government policy perspective; by way of adopting a wider fiscal deficit to increase spending and fuelling economic growth. This reflects the intent to not be constrained by rating agencies or self-imposed inflation targets.
Government deserves credit for stepping away from constraints (fiscal deficit, inflation and rating agencies) and taking a more holistic view and putting in context of what the country needs. There is no better solution to India’s multiple problems from the common man’s poverty, to the young man’s lack of jobs to the lack of competitiveness for the entrepreneur than ‘growth’.
This would be achieved by a sizeable increase in Government Borrowings from the market and no additional Covid-19 taxation burden or Wealth tax on individuals or corporates (as was feared). The stock markets have welcomed the bold shift in policy stance along with a slew of other positive measures as the Sensex surged by 2,300 on Budget day.
Unlike past Budgetary exercise, the budget finances this time are grounded in ‘realism’. The fiscal deficit in FY21RE is pegged at 9.5 per cent of GDP, for which the Government will need to borrow another Rs 800 billion from the market in the next two months. The fiscal deficit in FY22BE is estimated to be 6.8 per cent of GDP (higher than expectation). The Government plans to continue on the path of fiscal consolidation and reach a fiscal deficit level of 4.5 per cent of GDP by FY26P with a fairly steady decline over the period. This is expected to be driven by divestment of Public Sector Enterprises, monetisation of land and increased tax revenues through improved compliance.
Notably, despite the high projected fiscal deficit, the bond yields have only increased by 10 bps as the market seems to have noted the ‘conservative’ approach of the Finance Minister. The fiscal deficit rate projected (FY22 BE) is perhaps higher than expected but market has drawn comfort from the fact that they have not assumed tax buoyancy and there remains a significant upside to nominal GDP growth estimates.
The Budget is high on transparency. The Budget has sought to neutralise one of the key concerns related to off-balance sheet deficit. It has sought to use the opportunity of Covid-19 pandemic year to come clean. But it is also a reflection of the intent that we are fine to live with higher fiscal deficit. The Government will discontinue NSSF loans to FCI for Food Subsidy, which has been a wide source of criticism for the Government as these are off-budget items. The Government has made provisions for these in FY21RE and FY22BE, which could be responsible for the higher fiscal deficit. NSSF loan amount outstanding with FCI as at end FY20 was Rs 2.5 trillion.
The Budget is highly growth-oriented and would boost employment generation with a keen focus on capex in Infrastructure and Health. While the Government has borne the responsibility of capex in the absence of private sector investment over the last 5 years, the Government has signalled its commitment and resolve to step up to kickstart the virtuous cycle.
Out of the total budgeted expenditure of almost Rs 35 trillion in FY22BE, capex accounts for Rs 5.54 trillion (16 per cent share), an increase of 34.5 per cent over FY21BE. As India continues its vaccination program, there is an allocation of Rs 35,000 crores for Covid-19 vaccines in FY22BE, with a promise to cover-up any shortfalls.
There is emphasis on roads and highways infrastructure (National Highway works of over 6,500 km) in the election bound states of Tamil Nadu, Kerala, West Bengal and Assam. Other infrastructure plans include investment in railway infrastructure, expansion of metro rail network, new technologies of ‘MetroLite’ and ‘MetroNeo’, augmentation of city bus service and 7 new Textile Parks.
Steps such as proposed privatisation of 2 Public Sector Banks (PSB) and one General Insurance company is significant. Significant not because these 2 PSB will lead to significant step up in credit growth, but significant that they are no holy cows. Government is in no business to be in business. PSUs are far less productive as compared to private sector across sectors – Banks, Telecom, Airline, Metals. Hence signalling the intent to monetise and deploy in areas that can help spur growth.
Receipts from disinvestment is estimated at Rs 1.75 trillion in FY22BE. While the Government also announced plans for IPO of LIC in FY22BE, it intends to complete all announced disinvestments of BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam Ltd in the year.
We remain circumspect and sceptical as this may get mired in political opposition and resistance by union. But the message here is that despite the opposition on farm laws, the government is intent on pursuing what it is thinks is economically right even if it is politically inconvenient.
The Budget also outlines a roadmap for strategic Disinvestment over a period of time, with bare minimum Public Sector presence in four strategic sectors (Atomic energy, Space and Defence; Transport and Telecommunications; Power, Petroleum, Coal and other minerals; Banking, Insurance and financial services). Rest all will be privatized or closed down gradually.
The Government believes idle assets will not contribute to AtmaNirbhar Bharat. The Budget outlines a mechanism by way of a Special Purpose Vehicle (SPV) in the form of a company to monetize government and PSU held land.
The Budget proposes to launch a National portal for gig, platform, building and construction-workers among others. This will help formulate Health, Housing, Skill, Insurance, Credit, and food schemes for migrant workers. The Budget reiterated that social security benefits will be extended to gig and platform workers. Minimum wages will apply to all categories of workers, and they will all be covered by the Employees State Insurance Corporation. Women will be allowed to work in all categories and also in the night-shifts with adequate protection.
In order to boost domestic manufacturing, cut down on import bills, increase exports and create new jobs, the central government has reiterated the PLI schemes for 13 sectors amounting to Rs 1.97 trillion. The PLI scheme will make Indian manufacturers globally competitive, attract investment in the areas of core competency and cutting-edge technology, ensure efficiencies and create economies of scale. The idea of the PLI program is to get large manufacturers to India, whether integrating India as part of the supply chains or encouraging them to set up new base. By linking incentive to production rather than exports, the government has tried to keep it WTO compliant too.
This Budget continues with the theme of improving ‘Ease of Doing Business’ in India and simplification of compliance as seen in the Labour Laws. Attempts are being made to make all processes simple, transparent and online to the extent possible.
The Budget reiterated that compliance burden on employers will be reduced with single registration and licensing, and online returns. Other measures include benefit to more than 2 lakh companies in reducing compliance burden by changing paid up capital and turnover criteria; exemption from filing income tax returns for senior citizens who only have pension and interest income; reduction in time-limit for re-opening of income tax assessment; relief to small trusts having annual receipt of upto Rs 5 crore; removal of inverted duty structure in GST; setting up of Dispute Resolution Committee (DRC) for small taxpayers; setting up of a National faceless Income Tax Appellate Tribunal Centre; audit exemption for persons undertaking 95 per cent of their transaction digitally upto Rs 10 crore etc.
In the backdrop of the ongoing Farmer Protests, the Budget assured continuation of MSP (a key point of dispute) at 1.5 times the cost of production across all commodities. The Budget showed a growth trajectory that will not be constrained by resources. What remains to be seen, is how well this Government can execute the budgetary measures, which marks the beginning of a growth cycle to achieve the promise of a $5 trillion economy.
