Finance minister seeks to achieve more with less in Budget 2021

(Image: News18 Creative)

How would you plan to bat and plan an innings on a cricket pitch that has radically altered because of an abrupt turn of events that none had anticipated?

Would you take risks, be aggressive, and leave the crease to score runs quickly? Or will you focus on playing the grafting game, conserve wickets and wait for the pitch to ease out before going for the big shots? The final objective is to accumulate runs at a decent pace without losing wickets quickly — and that will give the team a chance to win.

It is a complicated predicament, something similar to what Finance Minister Nirmala Sitharaman has faced ahead of the presentation of the Union Budget 2021-22.

Broadly, the minister would have faced the following set of six questions over the last few months:

• How do you raise people’s income, particularly among the poor and the marginalised who have been affected the most?
• How do you frame policies to enable rapid employment opportunities, particularly for the semi-skilled and the unskilled?
• How do you offer India’s farmers a better deal without compromising on the government’s reformist intent?
• How do you quickly scale up India’s health infrastructure to make it affordable and accessible to all?
• How do you ensure that India’s banks remain healthy enough to be able to lend?
• How do you raise revenues to spend your way of this crisis without taxing too much and borrowing beyond your means?

COVID-19 has left a devastating trail of destruction across the economy. On a relative basis, it hurt the poor more because the better off could dig into their savings to tide over the adversity as incomes fell.

At a macro level, income is a function of demand. More demand for goods and services, would normally prompt companies to invest more, add more capacities and hire more that leads to higher income.

Many would have expected Sitharaman to address this by cutting taxes for those at the lower income brackets. This would have left more money in their hands, a part of which they would end up spending, setting off a cycle of higher demand and more investment. That she chose to keep the tax rates unchanged, rather did not offer any tax breaks for individuals, could leave the salaried class a little underwhelmed.

The second problem is generating employment, which also remains India’s central long term challenge.

Sitharaman has acknowledged this problem as she alluded to the plight of migrant labourers. The minister has sought to address this through a three-pronged approach. One, by according micro, small and medium enterprises (MSMEs) as a priority area for policy and budgetary support over large corporations.

The MSMEs account for 30 percent of India’s gross domestic product (GDP), 45 percent of the manufacturing sector and 25 percent of the employment. Their revival is essential to create employment and absorb the armies of youth that are joining the workforce every year.

Two, Sitharaman announced the creation of a database or a repository of up to 250 million informal workers and migrants, with the aim of ensuring that they get the benefits of the government’s welfare schemes.  A direct income transfer scheme for the poor, however, did not come about, and that may leave some who had been arguing for it a tad disappointed.

Three, she identified infrastructure for pointed attention, announcing the setting up of an “infra bank” to accelerate project financing. Investment in such projects has a strong positive multiplier effect.

According to some estimates the roads and infrastructure sector  can potentially create 2.7 new jobs for every Rs 1 lakh invested, with major forward linkages to sectors such as real estate, and manufacturing and backward linkages to steel and cement among others.

The most important political economy question confronting the finance minister may well have been on the farmers’ protests. With a feisty Opposition rallying around to pin the government down on ‘anti-farmer’ moves, Sitharaman reeled out the NDA government’s record on minimum support prices (MSP), reiterating the government’s welfarist stance for farmers.

The impasse over the farm laws, to a large extent, is also a reflection of trust deficit. The government has now obliquely sought to demonstrate its intent to walk the talk on the issue, in a message that it means to meet the farmers’ mid-way of the deadlocked matter. Will this help assuage farmers? The jury is still out on that.

The COVID-19 pandemic has catapulted health into the centre-stage of mainstream thinking. A global public health emergency, after all, has pushed economies into deep recession.

Sitharaman unveiled a health budget plan with the aim to move India's annual healthcare spend to Rs. 2.3 lakh-crore in 2021-22, from the current year's  Rs. 94,452 crore. This is a long overdue move, given that India’s central spending on healthcare has been a meagre 1.3 percent of GDP — way below China, Brazil, Russia and developed countries.

India’s ability to regain its lost status as a global growth engine will also critically depend on its banks’ ability to finance this growth. India’s lenders are staring at a bad loan crisis of enormous proportions.

In a worst-case scenario, the bad loans are likely to rise to 15 percent of the total loans. The minister announced plans to set up a ‘bad bank’ that moves banks’ bad loans into a separate, newly set up entity, and clean up banks’ balance sheets. Separately, she announced plans to privatise some public sector banks (PSBs) by bringing in strategic partners, a move that could run into stiff resistance from labour unions.

The biggest question, however, is how much more has the finance minister decided to spend and how does she intend to make ends meet? The government will spend Rs. 34.83 lakh-crore in 2021-22, higher by about 1 percent compared to the revised estimates of the current year.

The confidence about the ability to spend is predicated upon a few expectations. One, the government expects to earn Rs. 1.75 lakh-crore by selling stakes in public sector companies through an aggressive disinvestment programme next year. The success of this will depend on several factors, including the ability to pull off many big-ticket strategic sales that look ambitious given the uncertainties in the world economy.

Two, the finance minister is expecting net tax revenues to grow by 15 percent to Rs. 15.45 lakh-crore in 2021-22. For this to happen companies may have to outpace even their pre-COVID-19 levels of income and profitability by a fair margin.

The finance minister is seeking to serenade a new future with some bold assumptions. The medium-term projections are rosy and full of hope. The mantra, it appears, is to achieve more with less.

Gaurav Choudhury is founder and CEO, Earshot Media. Views are personal.