Tabled in the backdrop of a crisis-struck economy, the Union Budget 2021-22 attempted to nurse the economy back to health. Faced with subdued consumer demand, less spending on infrastructure and a historic contraction in four decades, the Budget had massive challenges to address, many even pre-dating COVID-19.
The Economic Survey made a case for a massive fiscal push to enable counter-cyclical measures. Consistent with this, a slew of measures were announced by Finance Minister Nirmala Sitharaman. The Economic Survey advocated deficit financing as long as the growth of the economy was higher. Given the deficit growth and revenue receipts in the COVID year, the Budget expected to push growth in every possible manner. The Budget, in that sense, gives a mixed outlook on the growth path for the country to recover from the pandemic caused slowdown.
The Budget, as anticipated, gave a major push to health-care by raising the outlay by 137 percent. Given that India has one of the highest out-of-pocket (OOP) expenditure, the measure announced in the Budget would likely bring down OOP, leaving people with more disposable income for consumption. But the challenge lies in the nuances involved in the implementation, the locations for the new infrastructures, the availability of the nursing staff, supporting ecosystem at the local level, etc.
Government spending on infrastructure projects also formed a major part of the announcement to augment India’s infrastructure and generate job opportunities. It raised the allocation to rural infrastructure development to Rs 40,000 crore for the next fiscal from Rs 30,000 crore in FY21.
Historically, India’s GDP growth has been consistent with the growth in the rural sector. The growth years have coincided with flagship schemes such as the Pradhan Mantri Sadak Yojana and the Mahatma Gandhi National Rural Employment Guarantee Act. The move would undoubtedly help create more liquidity on the rural front in the form of employment generation, thereby triggering a cycle of demand and consumption. The affordable housing project has presented a positive signal to the market that would keep the demand buoyant in 2021.
A major disappointment in the Budget was the protectionist stand taken in many key sectors where India’s shows potential. It could pinch both manufacturers and end-consumers.
The custom hike on compressors for refrigerators and AC, auto-components, mobile parts, etc would be detrimental in two ways. It can shut cheap sourcing options for domestic industries, making final goods expensive for the consumers, while also making them uncompetitive in the global market. Many of the personal items are going to be dearer for the consumers.
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Overall, the Budget did not see any direct push in increasing the private consumption of the households. Contrary to taxpayers’ expectations on raising money in the hands of salaried individuals to reinvigorate household consumption, the Budget did not announce any significant changes in personal taxation. The tax slabs, Section 80C exemption, remain unchanged. While it attempted to ease filing, one has to see the degree of easiness suggested.
Debt and sustainability: Reality Check
The Economic Survey indicated that India must borrow more to push infrastructure development, suggesting that as long as the country’s GDP growth rate is higher than the rate of interest at which funds are borrowed, the country will be able to repay the debt.
The strategy to undertake a massive fiscal push has many ramifications. The Institute of International Finance data shows that India’s total debt is at 130 percent of GDP, of which the government debt stood at 69 percent of GDP and the private sector at 61 percent. In this scenario, keeping a balance between domestic and external borrowing is crucial. The report said India’s corporate sector had the highest level of debt stress in the world. In this scenario, if the government decides to borrow domestically to finance its deficit, it can crowd out private investments through higher borrowing cost, further smothering private entities.
Chief economic adviser Krishnamurthy Subramanian mentioned about funding coming from a combination of disinvestment revenues, borrowings, tax and non-tax revenues. While tax collection showed some buoyancy, other sources like disinvestment present little hope due to a persistent track record of missing the targets. With limited capacity, the government should also have considered rationalising revenue expenditure through privatising loss-making units beyond the two PSUs announced.
Overall, the attempt to give a “Feel Good Factor” to the masses is missing from the Budget in a pandemic year. The Budget does not have any big-bang announcements or bold reforms except a couple. The message that the mass gets is that one should be conservative in spending in the immediate future also.
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