Budget 2021: A growth-oriented transformational move to help India exit the recessionary impact of COVID-19

Budget 2021-22 must be viewed against the backdrop of the recessionary impact of COVID-19 and what is required to exit it with strong economic recovery, write TV Mohandas Pai (Chairman, Aarin Capital) and Nisha Holla (Visiting Fellow, Observer Research Foundation).

TV Mohandas Pai

Nisha Holla

Wednesday February 03, 2021 , 6 min Read

Budget 2021 must be viewed against the backdrop of the recessionary impact of COVID-19 and what is required to exit it with strong economic recovery. India needed a growth-oriented Budget with increased spending on health and infrastructure, and reforms, and Budget 2021 met all these requirements.

There was apprehension about taxes being levied to meet the unexpected costs of handling COVID-19, as well as on rapid decline in fiscal deficit by austerity measures for the next year. Thankfully, neither has materialised and the biggest takeaway is that the government is embarking on an expansionary growth policy by focusing on health and infrastructure spending.

It has pegged fiscal deficit at 9.5 percent for FY21, including budget subsidies. Subsidies budgeted for FY21 is Rs 5.95 lakh crore against Rs 2.28 lakh crore in FY20 with food at Rs 4.2 lakh crore and fertiliser at Rs 1.3 lakh crore.

Entering these items into the Budget has bumped up the fiscal deficit creating a one-time backlog. This will clear in FY22, with subsidies coming down to Rs 3.35 lakh crore including Rs 2.4 lakh crore for food and Rs 79,000 crore for fertiliser.

The National Small Savings Fund is also brought directly into the budget; the FCI will not borrow from NSF and take it off budget. With the fiscal deficit at Rs 18.5 lakh crore (9.5 percent of the FY21 GDP of Rs 194.8 lakh crore), hopefully the government will clean up its financing, meet all the expenditure for the year and put this exceptionally eventful year behind us.

The fiscal deficit is expected to reduce to 6.8 percent with reduced borrowing on absolute terms in FY22.

Health

Health spending has increased by 137 percent this year with Rs 35,000 crore earmarked for COVID-19. This is a welcome attitudinal change by the government by investing in public health with primary, secondary and tertiary centres, rural and urban centres, hospital blocks, and national laboratories and institutes.

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Infrastructure

India needs world-class infrastructure to grow and compete in the world economy. Public spending is the single largest driver here and the government has focused this Budget on providing the impetus.

What is especially heartening is the focus on creating innovative sources of funding by selling off assets, by monetising existing assets like highways and airports and introducing a Development Financial Institution with an Rs 20,000 crore outlay to raise Rs 5 lakh crore to fund projects. Infrastructure spending has been proposed to increase from Rs 4.39 lakh crore to Rs 5.4 lakh crore.

Local manufacturing

Expanding the Production Linked Incentive scheme to 13 major industry sectors and increasing customs duty for many items to protect against dumping will incentivise indigenous manufacturing. China has long dominated India’s imports, built a $400+ billion trade deficit over 10 years, and is prone to dumping despite anti-dumping laws. The increase on custom duties to promote local industry and incentive programmes and funding is welcome.

Urban mobility

Quality mobility options in urban areas are in short supply and are hurting productivity. Improving capacity of public transit options like Metro and buses will contribute to growth.

Power distribution

While power generation and transmission has vastly improved over the last few years, distribution still suffered from lack of proper pricing, from wastages and robbery.

The massive outlay of Rs 3 lakh crore for DISCOM investment and upgradation, as well as the focus on creating competitive options for consumers will help stop price gouging and enable better access to power for Indian citizens.

Financial sector

Here, the creation of new and consolidated legislation for securities, permanent bodies for corporate bonds and gold exchanges, amendments to the Insurance Act to increase foreign investment from 49 percent to 74 percent, and focus on stressed assets by creating asset management companies are all welcome measures.

Deposit insurance companies and NBFCs will be further reformed to revitalise their contribution to economic growth. Decriminalising the Companies Act and liberalising LLPs and LLCs, as well as easing up on one-man companies will help companies grow faster.

Disinvestment

The government has put serious effort into creating a suitable background for disinvestment in the coming year. While the target of Rs 1.75 lakh crore must be seen against the failure of the earlier target of Rs 2 lakh crore, this year will hopefully see LIC and IDBI, as well as other banks, get privatised.

State governments

Incentives for state governments to pursue economic growth strategies with increased borrowing options are strong. With strategic sector PSUs being limited and non-strategic sector PSUs being divested, it means the government will not waste citizens’ and taxpayers’ resources on funding unviable PSUs.

Farmers

The data presented with the amount of benefit farmers have accrued via MSP is interesting and must be collected and collated on public databases. Total central and state subsidies to farmers including food, power, fertiliser, water, DBT and others exceeds Rs 7.5 lakh crore; this is a large quantum and requires public debate.

A significant amount of this goes, perhaps, to larger richer farmers at the cost of the taxpaying public and needs to be rebalanced.

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Education

There doesn’t seem to be a particularly large focus on education, especially in the wake of the National Educational Policy 2020, apart from the proposed clustering of higher education universities managed by the private sector.

Innovation and R&D

The outlay of Rs 50,000 crore over 5 years towards the National Research Foundation is a welcome move and can serve to improve India’s innovation pipeline vis-à-vis China and the US.

The focus areas of digital payments, vernacular languages, space and deep ocean exploration are great, and can be augmented with other critical areas. The benefits must not be limited to the public sector but must involve the private sector too.

Tax reforms

The government is serious about tax reforms and is taking advantage of scalability via digital platform by setting up tribunals in addition to electronic adjudication of taxes.

More reforms to simplify tax structures on the taxpaying middle class would have been a welcome move, especially in the wake of COVID-19 and the introduction of the convoluted seven-slab structure last year.

Startups

The startup ecosystem is disappointed by the lip service on extending tax incentives and the unworkable capital gains regime. The government has not done anything to increase the flow of capital into startups by reducing the unbearably high rate of capital gains over Rs 5 crore income of 28 percent, as against for listed stock at 11 percent.

Overall, this Budget deserves a 9.5/10 considering the background. There is a sigh of relief with no new tax or surcharge measures; the government has understood that citizens cannot be unfairly taxed in a bad year. The animal spirit of the entrepreneur has to re-emerge.

Though the lack of support for startups is disappointing, the accelerated spending on health and infrastructure, boost for indigenous manufacturing, tax reforms and reforms in the financial sectors are all welcome measures to boost the economy and realign India’s trajectory towards the $5 trillion GDP goal.