BUDGET TESTS +VE FOR HOPE

Sitharaman goes for big boost in capital expenditure, loosens purse strings on fiscal deficit No change in personal income tax slabs despite the revenue strain caused by coronavirus pandemic

NEW DELHI: Finance minister Nirmala Sitharaman on Monday unveiled a Union Budget that promised significant increase in health and capital expenditure, reforms including the privatisation of two state-owned banks and a general insurance company, substantial government spending not just next year but over the next five, and, most importantly, announced no major new taxes or levies.

Industry, the stock markets, and some economists praised the budget for doing right by an economy that has been wracked by the Covid-19 pandemic, but which is now showing clear signs of revival. It has already started its Covid-19 vaccination drive, and the country has fortuitously dodged the second wave of the disease that has laid other countries low. The International Monetary Fund estimates India will grow by 11.5% in 2021-22. The Economic Survey presented ahead of the budget estimated a real growth of 11% and a nominal one of 15.4%. The budget itself was a tad more conservative – basing its arithmetic on an expected nominal growth of 14.4%.

“This budget provides every opportunity for our economy to raise and capture the pace that it needs for sustainable growth,” the finance minister said in her budget speech.

But some other economists and the Opposition criticised the budget for reorienting its spending to capital expenditure and away from welfare schemes – something that they said would hurt the poor the most.

“Forget putting cash in the hands of people, Modi govt plans to handover India’s assets to his crony capitalist friends,” Congress leader Rahul Gandhi tweeted.

In 2020-21, as the Indian economy was roiled by the pandemic, and private investment shrank even more, the government stepped up its own spending — according to the revised estimates for the year, it will spend ₹34.5 lakh crore, up from a budgeted estimate of ₹30.4 lakh crore, and compared to the ₹26.8 lakh crore it spent in 2019-20. For 2021-22, the budget has retained the government’s overall spending at almost the same level, ₹34.8 lakh crore, but reduced its revenue expenditure by around ₹82,000 crore, and increased its capital expenditure significantly by ₹1,15,073 crore. The bet, clearly, is on growth.

“Capital expenditure is a sure-shot way of creating a virtuous cycle,” Sitharaman said in an interview, adding that this approach will have both a shortterm and a long-term impact as compared to cash-in-hand welfare schemes that largely create short-term demand.

To supplement this, India is also setting up an infrastructure-focused development finance institution, the National Bank for Infrastructure and Development, with a capital base of ₹20,000 crore and a targeted portfolio of ₹5 lakh

crore in three years, the finance minister announced.

The continued emphasis on government spending, and some pragmatic assumptions on revenue – the budgeted tax revenue in 2021-22 is ₹15.45 lakh crore, compared to the 2020-21 revised estimate of ₹13.44 lakh crore and a budgeted estimate of ₹16.35 lakh crore for the same year – mean that the fiscal deficit remains high next year, 6.8%, compared to 9.5% (revised estimate, 2020-21) and an ambitious budget estimate of 3.5% in 2020-21. Recognising the importance of government spending over the next few years, the government has given itself the room to spend, announcing that it will amend the Fiscal Responsibility and Budgetary Management Act, and that it will reduce the fiscal deficit to 4.5%, only by 2025-26.

That same pragmatism is also evident in the budget’s targeted receipts from disinvestment – ₹1.75 lakh crore as compared to a budgeted ₹2.1 lakh crore in 2019-20 (the revised estimate is ₹32,000 crore). Sitharaman also announced the monetisation of land belonging to government departments as well as stateowned companies, and an initial share sale of the Life Insurance Corp, but has not factored any receipts from them. It is also likely that the proposal to privatise the state-owned banks will face some opposition from other parties, although it has been welcomed by the finance sector.

“The financial sector saw the announcement of several landmark announcements, including setting up a Bad Bank in the form of Asset Reconstruction & Management Company, increasing the FDI limit in the insurance sector to 74% and the proposal to disinvest two Public Sector Banks, IPO of LIC and one General Insurance Company in FY22. All these are bold moves indeed, and are expected to buttress the growth recovery process apart from making our financial sector future ready,” said Confederation of Indian Industry (CII) president Uday Kotak.

Congress leader and former finance minister P Chidambaram said: “The government intends to privatise two PSBS. The intent of the government is clear: let the PSBS bleed slowly so that they can all be privatized in the short term. Let us see the reaction of the public to this unconcealed desire to selloff all public sector banks.”

Finance minister Sitharaman said that she would try to “reason it out” and pointed out that the government believes state-owned banks have “an important role to play in the country” and that India needs more banks such as the stateowned State Bank of India (the country’s largest lender), but that the banks also “need to have the strength to scale up.”

The budget also announced a sharp increase in health spending, from ₹94.452 crore (budget estimate for 2020-21) to ₹2.23 lakh crore. The increase includes ₹35,000 crore for Covid-19 vaccines (and more will be made available on demand, the finance minister said during her speech, and reiterated in the interview), and finance commission grants for water and sanitation, and health.

“The pandemic has rightly brought back attention to the much-needed topic of improving health care infrastructure for the populace. In this regard, we are heartened to note a large 137% increase in health and wellbeing spending for FY22,” Kotak said.

But apart from taxing interest on employee provident fund contributions in excess of ₹2.5 lakh – which will affect a miniscule fraction of people – and carving out a share of import levies for an agri infra development cess (which means there is no increased cost for the importers or end users), the budget avoided any changes in tax. Sitharaman said that she was “clear from the beginning” that India would not do that. “… We had not even thought along those lines. And today, we are showing that this has not been on the board ever.”

That may have been the best message to send to stock markets that had fallen in the run-up to the budget, nervous at the prospect of a Covid-era tax. The result, as some analysts put it, was a relief rally that saw the benchmark Sensex index rise 5%, the highest Budget-day gain in 24 years. The higher government spending also saw the benchmark 10-year bond yield rise 0.13 percentage points to close at 6.08%.