Budget 2021 was clearly expected to emphasise supporting the nascent recovery in growth. Still, the quantum of the total fiscal spending has surpassed expectation. Larger healthcare spending, support for MSMEs and rural economy are welcome steps in the current situation. The steps towards financing infrastructure remain aligned with India’s long-term growth aspiration.
Breaking The Shackles
The gross fiscal deficits of 9.5 percent and 6.8 percent of GDP during FY21 and FY22 not only mark a serious resetting of the FRBM path, but also indicate a major departure from the strong preference of a tight fiscal policy that was followed for several years. However, one feels that a decisive and credible stance on near term fiscal deficit and the FRBM targets was the need of the hour to convey the government’s commitment to continue with a much-needed counter-cyclical fiscal stance.
There had not been too many questions around the credibility of the fiscal arithmetic while the focus shifts clearly on how the government finance the larger-than-expected deficit. It is no surprise that the knee-jerk reaction of the fixed income market was negative given the significantly higher-than-expected deficit and borrowing. The market would expect hints of continued support from the RBI at this juncture, without which the pressure on yields might persist, if not aggravate.
On the other hand, the decisive step-up in fiscal spending should help equity market sentiment in the near-term. Reviving consumer confidence from the current unprecedented lows needs to be a key focal point for policymakers in the near term. While that may not be easy amid persisting high uncertainties on multiple fronts and in the absence of a strong social security net, large-scale and broad-based fiscal spending should offer some support over time, even if indirectly.
In this context, one notes that the oft-discussed fear of wider fiscal deficit resulting into risks to sovereign rating is only a partial picture, as dent in growth potential can also lead to rating downgrades. Also, expectations of a strong recovery in economic activities (nominal GDP: 14.4 percent y/y in FY22, as suggested by the Budget), should help against further rise in the much-discussed debt-GDP ratio.
Capex And Institutional Reforms
A classical dilemma in managing fiscal expenditure is the conflict between the near term and the longer term. However, it is heartening that longer-term priorities were not side-lined in the current budget; capital expenditure during FY22 is projected to grow at over 26 percent y/y. Admittedly, the budget did not provide near-term sops such as reduction in direct taxes, which was widely discussed.
However, stronger-than-expected capex plans, if executed well, carry the promise to support the recovery in growth across a large number of industries — such as steel, cement, real estate, engineering services, logistics and transportation — and employment generation. The government has also announced creation of a dedicated development finance institution (DFI) to fund the investments need for large-scale asset creation. Infrastructure creation requires a large quantum of capital for a long duration, which mainstream financial institutions aren’t always in a position to provide.
The budget announces an ambitious disinvestment programme. As the government has often fallen short of its disinvestment targets in recent years, analysts will closely watch progress on this front. However, the government appeared confident on this front including on plans of stake sales and IPOs of some of the large PSUs. Success on the disinvestment front remains all the more crucial in ensuring a smooth fiscal management during FY22.
The government also announced the creation of the necessary institutional framework — in popular parlance a ‘bad bank’ — to take over stressed debt, and manage and dispose of the assets to other potential investors for value realisation. One would look forward for the details and the fine prints of the proposal.
Monetary-Fiscal Coordination
Overall, Budget 2021 strongly demonstrates policy commitment not only in providing immediate support to the pandemic-struck economy, but also to focus on a number of key long-term priorities, which certainly boosts confidence despite the current challenging times. But, it is important to ensure that the wider fiscal deficit and the larger quantum of borrowing do not lead to any major pressure on the overall interest rate spectrum. However, given the strong intent demonstrated by policymakers of late, one remains confident of strong fiscal-monetary co-ordination in the coming months to pre-empt any undue pressure on interest rates.
Siddhartha Sanyal is Chief Economist & Head of Research, Bandhan Bank. Views are personal.
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