India has seen bold, realistic and reformist budgets over the last many years. In the midst of amazingly high public anticipation towards Union Budget 2021-2022, Finance Minister of India Nirmala Sitharaman who promised a ‘like never before budget’ presented the first-ever paperless budget.
Attempting to accelerate India’s growth after a once-in-a-century tremor, the Finance Minister has pressed few right buttons. While presenting the Budget 2021, the Finance Minister has fundamentally come clean on the budget arithmetic. By declaring higher fiscal deficit numbers of 9.5 per cent of the GDP and 6.8 per cent of the GDP for FY21 and FY22 respectively, she has placed convincing assessments of revenue receipts and recognized ‘off-balance sheet’ expenditures.
The Budget’s emphasis on increasing public investment by 34.5 per cent in the fiscal year 2021-2022 compared to the current fiscal year 2020-2021 is impressive. The Finance Minister while presenting the Budget mentioned that the government will borrow an extra Rs 80,000 crore for the purpose in the next 60 days. Achievement of this target would significantly depend on tax revenue realizations, disinvestment proceeds, sale of rail and road assets and the government’s capacity to nurture resources from the market, without raising interest rates for the private segment. Though the Budget obtained high marks from various industrialists, much more remains to be done. Let us look into a few disappointments delivered by this promising budget.
WRONG SHOTS
The Indian economy has been plagued with a recession and coronavirus is not only the exclusive cause for it. Nine straight quarters until the end of the preceding financial year have revealed the downward trend of GDP growth. On top of this, mounting stages of unemployment, demand crunch and deteriorating levels of workforce involvement rubbed salt into the wounds. This contraction is one of the nastiest among the world’s chief countries. In the fiscal year 2020-2021, India’s gross domestic product (GDP) net of inflation and per capita income are expected to decline by 7.7 per cent and 8.7 per cent respectively compared to the preceding fiscal year 2019-2020. However, the government of India’s reaction to tackle this anguish is not praiseworthy. The Budget has not acknowledged the employment crisis as was desired. The government’s additional public spending to deal with the unique emergency has been a little over 1 per cent of GDP. Many know that the government must rotate its thoughtfulness towards generating superfluous consumption demand through enhancement in the condition of the wage recipients.
The fiscal year 2020-2021 witnessed the sheer increase in the spending on Mahatma Gandhi National Rural Employment Guarantee Programme (MGNREGA). In contrast to the budgeted Rs 61,500 crore for the year, the modified estimation of spending was Rs 111,500 crore, an upsurge of about 72 per cent. Unfortunately, the government has decreased the expenditure of MGNREGA to Rs 73,000 crore for the fiscal year 2021-2022. This indicates that the government failed to consider vital problems blocking India to become a strong nation which needs robust support from the migrant workers who have been cruelly distressed by the disaster. Additionally, the government has also heralded that it does not think a resumption of domestic demand as part of the remedy to the current miseries of the economy. Likewise, the allocation for Pradhan Mantri Awaas Yojna is down from Rs 40,500 crore in 2020-2021 revised estimate to Rs 27,500 crore in 2021-2022 budget estimate. PM-KISAN allocation was Rs 75,000 crore in 2020-2021 budget estimate and it came down to Rs 65,000 crore in 2020-2021 revised estimate and has been maintained at that level in 2021-2022 budget estimate.
In India, economic inequality or disparity is rising astonishingly. On one side, a large number of poor people lost their livelihood in 2020 and on the other side corporate tycoons are sitting on tall mountains of profits. The Finance Minister has failed to address this mega concern of the country and the Budget has not considered levy of a special tax on super-rich people unlike many nations are proposing it.
The Budget announcements which deal with health infrastructure also need clarity. It is admirable if it relates to investment in enhancing urban sanitation, drinking water and sewage amenities. Rural Swachh Bharat Abhiyan has different lessons to teach. According to the latest National Family Health Survey data for 2019-2020 just building toilets in household premises is of no use without sufficient access to water and sewage services, which are public properties in nature. Unless these matching facilities are erected in a synchronized manner, the efficacy of such investments would be insignificant. Sadly India’s health infrastructure has faced methodical neglect over the decades. The dreadful pandemic has alerted almost all countries to strengthen their health system specifically from government spending. Sufficient accessibility and affordability of vaccines are essential for India’s economic revitalization. Importantly, the government should roll out an effective vaccination plan. Citizens of India were waiting for a government’s confident move through a budget. Then again, the numbers available from the recent Budget expound a gloomy image. The total spending on the health sector, which is expected to be around Rs 80,000 crore in 2020-2021, is estimated to decline to just above Rs 71,000 crore in 2021-2022. This shows the government’s inability to fulfill its promises to make Covid vaccines available for all. According to the International Monetary Fund, fiscal actions employed by India were among the tiniest among G20 nations. Constantly the IMF has been stressing the use of fiscal policies and also prompting governments about the growing part that public sector enterprises have been performing in developed countries. However, the government of India is neglecting this advice and intensifying the stride of privatization. In the recent Budget, the Finance Minister has made the big statement of divestment of government stake in the Life Insurance Corporation. Although privatization has its own merits, vending public assets
that are similar to family silver, is not a justifiable approach to supporting
the Budget.
The absence of long-standing credit for infrastructure is one of the major reasons for poor industrial and infrastructure investment during the last decade which has yielded low returns over a long period of time. Commercial banks are loaded with mounting non-performing assets because of poor corporate segment show. Therefore, they find it problematic to lend for the long term, say more than five years. Further, current experience demonstrates that most prosperous developing economies have relied on Development Finance Institutions for offering long-term credit. In this context, the Budget’s proposal of Development Finance Institution is delightful. However, the budget speech stated that the anticipated DFI will be funded by foreign portfolio investments. This is a matter of grave concern because FPI symbolizes short term inflows with exchange rate perils, while infrastructure investment is for the long-term whose incomes will be generally in rupees. Thus, FPI investments will certainly result in currency and maturity miss-match which will increase the cost of capital. For this reason, there is a necessity to consider different abiding sources, if possible from local sources, or international development organizations. In addition to crucial reforms in agriculture, labour and monetization of assets, the government has decided to increase the level of foreign direct investment limits in critical segments such as insurance and also stated privatization plans of government-owned banks. This exhibits the fact that the budget has only carried forward the supply-side emphasis of the government. Such policies may keep the fiscal deficit under check in a miserable revenue situation, but there will be a diminutive influence in terms of new economic activity and therefore increasing collective demand. Definitely, big-scale monetization of infrastructure assets namely roads and railways can lead to a slog in consumer charges and consequently higher inflation in the long-term. The probable tussle between the government’s suppositions and the reality of the economy will decide India’s trajectory in the succeeding year.
To conclude, the government has put the growth plan in place by announcing a bold and new-age budget. Now the mega task before the government is the execution of the plan. Otherwise, the budget acclaimed as a six-pack economic push will be unproductive. And the road ahead will be long and hard.
(The writer is an autonomous Finance and Tax Advisor. He has 24 years of experience in the field of Finance, Taxation, Cost Management, Audit, Business Management and Corporate Laws)
