The Indian economy which had survived the Great
Meltdown of 2007-2009, made a strong comeback thanks to its dynamic services and
information technology sectors. Moreover, the public sector banks proved to be
a boon to our efforts in surviving the crisis. Again, the economy took a
massive hit thanks to the November 2016 Tughlaqian demonetisation disaster. Still
reeling under its after-effects, the economy took a rather hard fall because of
the COVID 19 pandemic which has wrought fundamental changes in lifestyle, work
culture and a wide range of social and economic interactions.
MEETING THE UNIQUE CHALLENGE TO THE ECONOMY FROM
PANDEMIC
This presented a unique challenge. There was no tried
and tested approach to resolving the issues thrown up by the pandemic. Shutting
down of all economic activity resulted in loss of jobs on an unprecedented scale.
There were hard choices to be made – should the government go in for a drastic
change in the current pro-poor socialist economic model or continue with it as
a holding tactic? In the April-June quarter of the 2020-21 financial year, the
GDP contracted by 23.9%. this was followed by smaller contractions in the subsequent
quarters. Obviously, traditional methods were not capable of halting, let alone
reversing the freefalling economy. There was a need for three-pronged approach.
First, generate domestic demand for both consumer and capital goods. Second,
provide protection to the indigenous industry from foreign competition. Third,
make indigenous industry competitive in the global markets.
After dithering for
four budgets, Nirmala Sitharaman has bitten the bullet this time and discarded
traditional wisdom and dumped the pro-poor template to take a right turn. She has
gone for strategic disinvestment of BPCL, Air India, Pawan Hans, IDBI Bank,
Container Corporation of India, and two as yet unidentified public sector
banks. The process of identifying other public sector businesses is also on. Her budget hikes the foreign direct investment (FDI) limit
in the insurance sector to 74% from the current 49%. Most of the PSUs will be
privatized barring in four key strategic sectors like transport, telecom, defense,
atomic energy, power and coal etc. The assets of NHAI, PowerGrid, Railways,
airports, warehouses and sports stadiums too will be monetized in a planned
manner.
To keep the banks viable by getting rid of non-performing
assets, Nirmala Sitharaman announced formation
of an asset management company to take over stressed assets of banks. This
should resolve the perennial problem of bad loans.
Clearly, the government is determined to get out of as many
businesses as possible while restructuring the others to make them efficient
and profitable.
SHIFT FROM SUPPLY SIDE TO DEMAND SIDE ECONOMICS
So far, annual budgets have been focusing on the
supply side economics. This budget reverses the trend by paying attention to
the demand side. It focuses on spending big to generate jobs, which in turn
should boost domestic demand. This is the right step as it will encourage investment
and production in the industrial and services sectors.
The budget once again provides for
major spending on roads and highways, railways, textiles, metro trains, health
and water supply. Seven textile parks will be set up over three years. Sitharaman
announced new highway projects. She has provided 1.03 lakh crores to build 3500
kilometers in Tamil Nadu; 65000 crores for 1100 kilometers in Kerala; 25000
crores for 675 kilometers in West Bengal; and 34000 crores for 1300 kilometers
in Assam. To boost indigenous production under the AtmaNirbhar Bharat policy, a
sum of Rs 1.97 lakh crore has been envisaged over the next five years.
Moreover,
the Finance Minister has more than doubled the healthcare spending to Rs. 2.2
lakh crore. Out of this, an amount of ₹ 35,000 crore has been
allocated for developing Covid-19 vaccines. In an incentive to the farming
community, she has announced an increase in agriculture credit target to Rs. 16.5
lakh crore in FY 2021-22.
HOW
TO MEET THE MEGA EXPENSES?
It is alright to envisage
mega-investments and go in a big way for empowerment and welfare projects. But where
would the funds come from? Already, there are estimates of a fall in government
revenues to the tune of Rs 2 lakh crore, or about 1% of the GDP. Out of this,
tax revenues are expected to drop by about Rs 90,000 crore, a decline of 6% compared
to last year’s estimates. Within this, income tax revenue is expected to
decline by 12% compared to last year’s Budget projections, corporate tax
revenue is projected to drop by 20%, and GST collections are expected to go
down by 9%. The non-tax revenue is projected to be lower by 37% compared to
last year’s estimates.
The government’s disinvestment
target of Rs. 1.75 lakh crores also appears a bit unrealistic, given the past experiences.
In 2019-20 it had estimated to fetch 65,000 crores but could get only 50,000
crores. In 2020-21 it stepped up the target to over 2 lakh crores but ended up
with about 35,000 crores. So, how would the government meet the target of 1.75
lakh crores this year? The proposed sale of government owned land, stadiums,
airports and highways may not fetch enough funds. Especially when the
government has planned to increase its expenditure by more than 4.4 lakh crores.
This will increase the expenditure from the already high 13% of the GDP to over
16% this year. And we are not even
factoring in the expenditure on defense – which the budget has not mentioned
this time.
Perhaps
this is the reason why the government has reduced allocations by 13% on PM-Kisan
scheme and by 23% on PM Gram Sadak Yojana. Similarly, there is a 12% cut in the
budget for the National Education Mission. The petroleum subsidy has been cut
by 68%. But are these savings in spending enough?
NOT
ALL SPENDING IS PRODUCTIVE
On the face of it, the budgeted
expenditure looks impressive. But when we go into the details, we realize that
a big chunk of the spending is going to be on non-productive account heads. For
example, there is an increase of 28% on financing the Food Corporation of India’s
procurement efforts. The interest payments are estimated at more than Rs. 8
lakh crores which is 1 lakh crore more than the previous year.
Disinvestments are estimated to bring 1,75,000 crore
rupees into the government coffers – which may or may not happen. Then there is
the surge in GST collections from a low of about 33,000 crores in April 2020 to
more than 1.20 lakh crores in January 2021. This trend is expected to gain
strength in the 2021-22 financial year. Similarly, the agricultural cess on
petrol is expected to be another source
of income. The direct taxes have not been touched, except that pensioners above
the age of 75 years will not have to file IT returns. Of course, to incentivize the purchase of
affordable house, the finance minister proposed to extend the period for claiming
an additional deduction for the interest of ₹ 1.5 lakh paid for home
loans by one year to March 31, 2022
So, most of the additional funds will come from disinvestments
and tweaking of indirect taxes. The shortfall will be made up by stepping up
deficit financing from current 6.8% to 9.5%.
OVERALL, A BUDGET OF
HOPE, BUT…
Education
gets 6% cut in allocations. At the same time, the Finance Minister claims that,
apart from opening additional Sainik Schools, 15,000 schools across the country
will be upgraded in a manner that they become exemplars. There is also talk of
improving the quality of teachers and teaching. But no roadmap has been
revealed yet. Moreover, the existing Sainik Schools are not exactly in good
health in terms of teachers and infrastructure.
Although
human resource development and education could have been given greater priority,
it is good to see the government going in for a transformative budget by concentrating
on Health and Well-Being, Physical and Financial capital and infrastructure,
Inclusive Development for Aspirational India, Innovation and R&D, and
Minimum Government, and Maximum Governance. This budget gives the nation hope
in its pushback against the pandemic driven economic crisis.
But,
let us not forget that the best of intentions needs a conducive environment to
fructify. The social unrest must be addressed. Divisive politics needs to be
shed forever. And, finally, federalism should be reinstated by reigniting the
trust between the Centre and the States. It is not difficult for the Modi
government, given its current strength and political capital.
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