Finance Minister Nirmala Sitharaman seems to have hit her stride on her third Budget. This year’s Budget has won plaudits even from economists and commentators who have so far been critical of the Modi government’s economic management.
The stock markets were particularly enthused by the Budget proposals with the Sensex marking its highest single day gains on Budget day in the last 23 years.
This year’s Budget has four major talking points.
This time around the Finance Minister has loosened the purse strings significantly, answering critics who have been berating the Modi government for being too niggardly in its spending in the aftermath of the Covid-19 pandemic. The fiscal deficit for the fiscal year 2020-21 has been marked at 9.5 per cent for the GDP, which is not surprising given the Covid sledgehammer on the economy. The deficit figure for the 2021-22 fiscal is set at 6.8 per cent, signifying the government’s expansionary intent, which is crucial for reviving the economy.
The government has also said that it intends to return to the fiscal glide path only in 2025-26, again signifying its expansionary intent. Here the government seems to be thumbing its nose at global rating agencies andrisking a ratings downgrade. Chief Economic Advisor Krishnamurthy Subramanian had some interesting things to say about ratings agencies and their methodologies in the Economic Survey.
The second important aspect of the Budget is the significant push for capital expenditure, especially on projects belonging to The National Infrastructure Pipeline. The thinking here is that a push on infrastructure spending, especially on roads and rail projects, will have what economists call a multiplier effect. That is spending on infrastructure will not only create more direct jobs it will also spur sectors providing inputs for infrastructure such as steel and create jobs there. So the expectation is that a major push in public investment will "crowd-in" private investment and boost growth.
For the first time in many years the Finance Minister actually said the word "privatisation" in her Budget speech. The NDA-I government of AB Vajpayee was big on PSU disinvestment. The Vajpayee government even had a separate Ministry of Disinvestment headed by the high-profile Arun Shourie. But this Ministry was promptly scrapped by the UPA government later.
This Budget has given a major push to PSU disinvestment with a target of ₹1,75,000 crore, also promising to privatise two PSU banks and one public insurer.
The Finance Minister has also promised to monetise the assets of PSUs lying unutilised. In fact, she even vowed to drastically prune the number of sectors in which the public sector will be present. The proceeds from the disinvestment will go into the government’s capex spending.
Financial sector reforms
The Budget has also given a push to financial sector reforms with an eye to clean up the bad debts mess in the banking system. There is a proposal to set up a "bad bank" and a development financial institution (DFI) to provide funding for infrastructure projects.
The PSU banks can offload their bad loans or NPAs to the "bad bank" or asset reconstruction company which in turn will focus on recovering at least a part of the loans. By offloading the NPAs off their balance sheets, the PSU banks can once again focus on lending.
The DFI proposal gives the PPP model of infrastructure a quiet burial. The PPP model was pushed aggressively during the UPA-I, which ended in huge asset-liability mismatches and financial strain on the PSU banks.
The health sector gets a major allocation in this year’s Budget which is not surprising given the havoc wreaked by the Covid-19 pandemic in the last one year. After years of neglect, the health spend has jumped to ₹2.24-lakh-crore of which ₹35,000 crore is earmarked for the Covid vaccination drive.
Also a new scheme — PM Atmanirbhar Swasth Yojana — has been allocated ₹64,180 crore over six years. This scheme will bolster the public healthcare system in the country, whose importance was crucially highlighted during the pandemic.
Another important feature of this year’s Budget is its push for transparency in finances. The huge borrowings of the Food Corporation of India, which were earlier usually kept out of the Budget, has this time been made part of the Budget. As a result the food subsidy has gone up to ₹4.2 lakh crore in 2020-21 and ₹2.4 lakh-crore in 2021-22. This lends credibility to the overall fiscal deficit numbers.
There are some pain points. The middle classes hoping for some tax sops to enable higher spending have been left disappointed. Also the move to tax PF contributions over a certain limit has come in for criticism. But thankfully an anticipated Covid cess has been avoided.
Important schemes like MGNREGA, which was a lifeline for the returning migrants during the lockdown, have been overlooked with meagre allocation.
But the on the whole this year’s Budget has got a positive response and one hopes the proposals will help revive the economy. But as JP Morgan economist Sajjid Chinoy has said in a recent column, the success of this Budget crucially hinges on its effective implementation.