Bold and Transparent Budget; Implementation Is the Key

Finance Minister Nirmala Sitharaman’s third budget is a serious departure from the budgets presented since the Narendra Modi-led NDA government came to power in 2014.

It has unveiled a bold vision of privatization and asset monetization to boost not only government revenue but presumably also, economic efficiency. The FM has also openly acknowledged the fiscal fault lines. The biggest miss is the absence of a direct help/cash transfer to the most vulnerable sections of the society. The FM has instead opted for the pump-priming of the economy through massive infrastructure boost (allocation of Rs 5.54 lakh crore for infrastructure, an increase of 34.5% over the BE of 2020-21).

No New Tax

For most of us, budget means possible changes in income tax rates. Coming after the worst economic year in post-1947 Indian history, the biggest relief is that the FM did not impose any new cess or hike tax rates. The new cess on petro/diesel is not going to hurt ordinary consumers, at least for the time being. Imposition of another cess is bad news for economic federalism (as states do not get a share in it) but given the economic contraction, perhaps there was no other way.

Hit & Miss Hit – No Tax Return for senior citizens over 75 with only pension and interest incomes Miss – tax on more than Rs 2.5 lakh savings/investment in PF and NPS. Amidst a steady fall in interest rates and overall savings, savers need more tax incentive

 Strong Statements of Intent

Instead of incrementalism, there has been a serious attempt to present a bold vision of reform in terms of privatization (not just divestment, the Finance Minister has clearly mentioned that the government is ready to sell off all PSUs except a few in strategic sectors and also two PSU banks and one insurance company), open up new channels of asset monetization (toll roads, telecom infrastructure, gas pipelines etc through InvITs or Infrastructure Investment Trust, a collective investment scheme like a mutual fund) and rent out the major ports to private players.

Spending Priorities

The overall budget size remains almost the same, at around Rs 34 lakh crores (both in Revised Estimate for 2020-21 and Budget Estimate for 2021-22). Since there is limited scope for revenue growth, the government has to focus on expenditure reform – instead of myriad schemes and ill-targetted subsidies, a few mega schemes like MGNREGA are likely to be more effective and fiscally prudent. The FM has mentioned in the passing about cutting down the number of schemes but there is no clear road map for it in the budget.

Ideally, the government should have focussed on increasing existing cash transfer (perplexingly, allocation under PM-KISAN is less in FY22) and introducing a universal cash transfer scheme. But barring that, the FM has ticked the three other boxes.

Post-pandemic, health has deservedly been given due attention (though Rs 2.23 lakh crore of health and wellness budget is a bit misleading as it includes not only one-time vaccination cost of Rs 35000 crores but also the Finance Commission mandated transfer to the states). Allocation for education has also been hiked. And we have already mentioned about infrastructure.

Hit & Miss Hit - Massive hike in infra-spending, focus on health Miss – No universal cash transfer/direct help to the most vulnerable sections

 Implementation Challenges

The big question is to what extent the government will be able to implement the privatization and asset monetization programme proposed in the budget. In stark contrast to the bold vision of asset monetization, the budget actually projects a modest disinvestment target (Rs 1.75 lakh crore). That is not a surprise given the failure to achieve disinvestment targets in the recent past, especially in 2020-21. The Indian stock markets have climbed to new life time highs and private companies raised a record amount this year but the government failed to take advantage of that. Against a Rs 2 lakh crore plus disinvestment target this year, the collection is likely to be just around Rs 32000 crore.

To even partially realize the road map presented in the budget, the government has to negotiate immense legislative complications (LIC IPO proposed in the last year’s budget, is yet to see the light of the day), market dynamics (to discover best prices) and most importantly and has to sell this politically. For any bold market-oriented reform, the timing of it is extremely crucial. It is far more difficult to sell such reforms during recessions/downturns.

Just increasing the budget outlay cannot guarantee any improvement in health or education outcomes. Improving governance and service delivery (of primary healthcare or clean drinking water) at the grass root level are difficult tasks.

Boosting infrastructure spending, on the other hand, is perhaps the easiest of these challenges and that, rightly so, got the stock market excited.

Alarming Fiscal Maths

The one magic number economists look at the Union Budget is that of fiscal deficit. To her credit, the FM has been very transparent and upfront. She has candidly projected a deficit target of 9.5% for the current year. Add another 4.5-5% for the combined fiscal deficit of the states and almost a similar amount of off-budget borrowing by the central PSUs, this means a total deficit of 20% of the GDP or as much as 40 lakh crores.

Even for the next year, the FM has projected a fiscal deficit target of 6.8%. Not only is this target very high, even the growth and tax projections (on which this is based upon), look difficult to achieve. Put it differently, government finances would continue to hobble unless there is a deep expenditure reform or significant demand revival, translating into revenue buoyancy.

Return of Inflation?

To finance a deficit of 18 lakh crore plus for this year and some 15 lakh crore plus next year, the government has to borrow that much from the market. Such humongous market borrowing will definitely push interest rates higher. Most of us were elated with the stock market reaction on the Budget day but the bond market went into a deep sulk at the same time. Since it appears that the government is not much open to the idea of raising money from international markets, it might even lead to printing of more currency to finance this deficit. But whichever way such a large deficit is financed, it is going to push up inflation. 

Do not forget your state budget also. Since they do not have banks and insurance companies to sell or monetize gas-pipelines and airports, they will be forced to levy more taxes on your petrol and diesel and hike property rates.

Whether as an individual or as a business, you thrive in inflationary times when you are able to maintain a good margin between your income/investment and expenditure/return and not too many in India are that well-positioned today.

So, the budget looks good as of now, but a lot depends on actual execution. It’s a perfect right wing budget, which bets on growth, rather than re-distribution or generating demand from below. Let’s hope that this strategy works.