Spur growth?

The 2021-22 budget, on the face of it, has given a massive fiscal boost to the economy. Fiscal deficit as a share of Gross Domestic Product (GDP) has gone up from the 2020-21 Budget Estimate (BE) of 3.5% to a massive 9.5% according to the Revised Estimate (RE) numbers. Fiscal deficit is expected to remain high going forward. It may only come down to 4.5% by 2025-26. Does this mean that the budget provides a massive fiscal boost to growth?

A careful reading suggests a more nuanced picture. A large part of the increase in fiscal deficit is explained by lower tax collections. Gross Tax Revenue in 2021-22, as per the BE figures, is not expected to reach 2020-21 BE levels. In absolute terms, the 2021-22 fiscal deficit (BE) is expected to be lower than the 2020-21 fiscal deficit (RE) by ₹3 lakh crore.

So, where will the boost to growth come from in 2021-22? The central government has pinned its hopes from public and private capital spending, and further enhancing ease of doing business.

There is a direct boost to the first.

Capital expenditure was increased from ₹4.12 lakh crore in 2020-21 (BE) to ₹4.39 lakh crore (RE) during the pandemic. This has been increased further to ₹5.54 lakh crore for 2021-22 (BE). This takes the share of central government capital expenditure in India’s GDP to 2.48% in 2021-22, the highest since 2015-16, the earliest period for which capital spending data is available at the Centre for Monitoring Indian Economy’s (CMIE) database. In addition to the cap-ex push, the Budget also talks about incentivising state governments to take up additional investment expenditure.

As far as private sector investment is concerned, the government has placed its bet on infrastructure and financial sector.

In keeping with the targets laid down in the National Infrastructure Pipeline, which targets investment of ₹111 lakh crore by 2025, the Budget has announced three ways to boost infra spending: creating the institutional structure for it; focusing on monetising assets; and enhancing the share of capital expenditure in central and state budgets. The first will be taken care of by setting up a Development Finance Institution (DFI), while the second will implemented by setting up a National Monetization Pipeline which will involve toll roads, gas pipelines, airports and government owned warehouses.

This, the budget speech says, will help in providing “viability to investors”. The budget has also announced the privatisation of two stateowned banks, a general insurance company, and an IPO for the Life Insurance Corporation, along with an increase in FDI limit from 49% to 74% in the insurance sector. The government clearly hopes that this will bring in fresh capital.

The budget has also proposed a conciliation mechanism and mandated its use for quick resolution of contractual disputes for businesses dealing with central public sector enterprises. It has allocated ₹1.97 lakh crore to the production linked incentive (PLI) scheme to boost domestic manufacturing in 13 key sectors, so as to make companies in these an “integral part of global supply chains, possess core competence and cutting-edge technology”.

The budget has also tried to boost the construction sector, a crucial source of non-farm employment by continuing to incentivise the affordable housing sector. Additional tax exemption of ₹1.5 lakh crore for affordable housing and a tax holiday for affordable housing projects have been extended by a year up to March 31, 2022.

“The finance minister has presented a progressive budget, focused on achieving growth through capital investment, job creation, infrastructure and health care build out which will be part funded through disinvestment and privatisation. The finance minister has also kept direct tax rates unchanged and proposed to simplify contractual regulations and investment regulations and proposed creation of more enabling organizations”, said Bhavik Damodar, Partner, Deal Advisory, Office Managing Partner-mumbai, KPMG in India.

To be sure, the budget could also generate some headwinds to growth because of a roll back in revenue spending compared to the 2020-21 RE figures. While capital spending has seen an increase, revenue spending, especially on welfare heads such as MGNREGS and even the flagship PM-KISAN scheme has been reduced. Some experts believe that this ignores the crisis facing the poorest sections in the economy.

“The proposed increased in capital expenditure is coming at the expense of non-capital expenditure, keeping aggregate spending the same. This shift is desirable in normal times, but in these times, it leaves a massive livelihoods crisis unaddressed”, said Amit Basole, an associate professor of economics at Azim Premji University.