WILL BUDGET 2021-22...

As the economy reels under the after-effects of the Covid-19 pandemic, analyses the impact of the Union Budget

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.

Balance the fisc?

When Union finance minister Nirmala Sitharaman presented the 2020-21 Union Budget last year, she announced that the Revised Estimate (RE) for the 2019-20 fiscal deficit would be 3.8% of GDP, 50 basis points higher than the Budget Estimate (BE) of 3.3%. It was seen as an undesirable development by the markets.

The BSE Sensex fell by 2.4% on February 1, 2020. Sitharaman pegged the 2021-22 fiscal deficit at 3.5% of Gross Domestic Product (GDP). Then the pandemic struck, making budgetary calculations completely irrelevant.

Not only has the fiscal deficit reached an all-time high of 9.5% of GDP in 2020-21,as per the Revised Estimates (RE) given in the 2021-22 budget, it is not expected to come down anytime soon. Sitharaman said in her budget speech on Monday that she expects the fiscal deficit to come down to 4.5% by 2025-26.

In normal times, this would have created a huge uproar. But these are not normal times, and the BSE Sensex endorsed the fiscal deviation, which is crucial for growth, by rising 5% on budget day.

It is useful to understand how the government’s fiscal math changed during and after the pandemic, and the assumption behind the 2021-22 Budget Estimate (BE).

India’s absolute fiscal deficit almost doubled from ₹9.3 lakh crore in 2019-20 to ₹19.5 lakh crore 2020-21 (RE). When compared to the 2020-21 BE numbers, the 2020-21 RE fiscal deficit has increased by 2.3 times. To be sure, this is not the additional government spending during the pandemic.

Total central government spending increased 1.3 times from ₹26.9 lakh crore in 2019-20 to ₹34.5 lakh crore in 2020-21 (RE). When compared to the BE figure of ₹30.4 lakh crore for 2020-21, the increase was 13.5%.

The rest of the increase in fiscal deficit can be attributed to two factors. The first is the fall in nominal GDP in 2020-21 , a contraction of 4.4%.

With the denominator going down, the fiscal deficit as a percentage of GDP can increase for the same amount of absolute deficit. The other big reason for an increase in the fiscal deficit is a sharp fall in revenue collections, the biggest components of the three receipt items – revenue receipts, recovery of loans and other receipts (disinvestment). These three are subtracted from the government’s total spending to calculate the fiscal deficit.

Revenue receipts, as per RE figures, fell short of the 2020-21 BE numbers by more than ₹4.6 lakh crore. Disinvestment income is expected to be just ₹32,000 crore (RE) against the BE target of ₹2.1 lakh crore.

How is the fiscal math going to change in the next fiscal year?

There is not much of a difference between the 2021-22 BE numbers with the 2020-21 RE numbers. The central government has retained spending at the levels seen during the pandemic. It also does not expect much of a revival in revenue receipts. The 2021-22 BE figure of ₹17.9 lakh crore is lower than the 2020-21 BE projection of ₹20.2 lakh crore.

A disinvestment target of ₹1.75 lakh crore for 2021-22 (BE), when read with the ₹2.1 lakh crore target in 2020-21 (BE) and a realisation of just ₹32,000 crore (RE) means that the government will try to accomplish in the next fiscal year, what it started in 2020-21. Given the fact that the government has announced disinvestment of a general insurance company and a public sector bank — neither was on the cards earlier — this also suggests a moderation in expectations of disinvestment income.

How realistic are the fiscal deficit calculations for 2021-22?

The core assumption behind fiscal calculations, especially when there are no major changes in tax slabs, is the projected nominal GDP growth.

Taxes, after all, are a fraction of nominal GDP. By assuming 14.4% nominal GDP growth in 2021-22, one percentage point less than what the Economic Survey said it will be, Budget 2021-22 seems to have taken a conservative approach.

Finance minister Niramala Sitharaman admitted as much in an interview, saying that the finance ministry has been “reasonable... in assessing” what it can do.

Most importantly, Union Budget 2021-22 has won a lot of praise for bringing a lot of off-budgetary spending back into the budget calculations.

The biggest manifestation of this is the allocation for subsidy to the Food Corporation of India under the National Food Security Act from ₹77,983 crore in 2020-21 (BE) to ₹3.4 lakh crore in 2020-21 (RE) and ₹2 lakh crore in 2021-22 (BE). The higher fiscal deficit numbers, going forward, need to be seen in this context as well.

Boost infra?

The Narendra Modi government has set itself a target of creating a ₹111 lakh crore National Infrastructure Pipeline by 2025. The 2021-22 budget has deployed a mix of old and new to achieve this target. This year’s budget has announced the creation of a Development Finance Institution (DFI), an idea India tried in the pre-reforms era before giving up. What is new is the unprecedented expansion in scope for private sector activity in infrastructure this budget proposes. If the ideas discussed in the budget are actually implemented, India might see more privately owned and operated roads, airports, railways, freight corridors, and ports.

Both these ideas are extremely important and potentially game-changing.

Let us take the idea of DFI first. Collapse of infrastructure projects, partly due to over optimistic revenue projections and partly because of courts cancelling resource allocations such as telecom spectrum and coal mines, played a big role in creating the bad loan crisis in Indian banks after the 2008 global financial crisis.

While it did not help that banks, especially the governmentowned ones, had poor governance mechanisms and kept evergreening stressed loans so that they would not have to make extra provisioning to meet capital adequacy norms, many experts have pointed out that banks were not the best suited institutions to lend to infrastructure projects. This was because infrastructure projects take a long time to break even, while banks deal with mostly short-term deposits.

Experts call this an asset-liability mismatch. It is in this context that the discussion about recreating a DFI framework started doing the rounds. This budget has tried to tap into this sentiment. The fact that the proposed DFI will begin with a budgetary allocation of just ₹20,000 crore, suggests that the government wants to test the waters. It has set itself a modest target of building a portfolio of ₹5 lakh crore for this DFI in three years’ time.

The other potential game changer in the infra sector is the focus on asset monetisation.

The budget speech says that “monetizing operating public infrastructure assets is a very important financing option for new infrastructure construction” and has proposed that even existing infrastructure assets including those with National Highway Authority of India, Power Grid Corporation, freight corridors of railways, airports, and oil and gas pipelines will be a part of the asset monetisation programme. To be sure, the asset monetisation programme is being taken along with a sharp rise in capital expenditure allocation in 2021-22.

The budget proposes to award contracts for construction of 8,500km of roads by March 2022, and completion of an additional 11,000km of national highway corridors. Ambitious targets have also been set in railways, waterways and urban transport infrastructure including public buses and metro rail network.

The budget has also made an outlay of ₹3 lakh crore over the next five years towards reforms-based and results-linked power distribution sector scheme to address the viability crisis in power distribution companies

It also seeks to provide a bigger playing field to foreign capital in the field of infrastructure by proposing to make amendments to relevant legislations to allow debt financing of InVITs (infrastructure investment trusts) and REITs (real estate investment trusts) by foreign portfolio investors.

“The FY22 budget, by announcing the setting up a development finance institutions (DFI) with a corpus of ₹20,000 crore will go a long way in filling up the gap created by the demise of erstwhile DFIs namely Industrial Finance Corporation of India, Industrial Credit and Investment Corporation of India, and Industrial Development Bank of India. DFIs, unlike banks, besides bringing in the knowledge of project financing are known to have the patient capital suited for infrastructure financing. The debt financing of InVITs and REITs by foreign portfolio inflows and monetisation of operating public infrastructure assets are the right steps towards infrastructure financing,” said a note by India Ratings and Research.

To be sure, some have pointed to part of the infra-push as being driven by the upcoming assembly elections in five states. “The budget announced construction of roads in states going for elections, is there any motive behind it? Why not other states? It announced road projects of 625km in West Bengal, but the state government has already constructed 88,841km of rural roads in 10 years, which has been recognised by the Government of India,” said Amit Mitra finance minister of West Bengal.

Congress leader Rahul Gandhi took a dig at the government’s asset monetisation plan in a tweet criticising the Budget. “Forget putting cash in the hands of people, Modi Govt plans to handover India’s assets to his crony capitalist friends.”

Alleviate distress?

India imposed one of the most stringent lockdowns in the world to prevent the spread of Covid-19 infections. The Economic Survey justified this by arguing that it prevented up to 3.7 million Covid-19 cases, but the strategy also caused a massive disruption to economic activity, affecting incomes and employment of those at the bottom of the pyramid.

In response, several economists, including Raghuram Rajan, the former RBI governor and Abhijit Banerjee, who was awarded the Nobel Prize in economics in 2019, argued for putting more money in the hands of the poor to compensate for this disruption. The government did that in 2020-21.

It enhanced allocation under key welfare programmes such as the MGNREGS , provided additional food grains to the poorest at subsidised rates, and made direct cash transfers to over 400 million people.

These measures have been withdrawn in the 2021-22 Budget, which has focused more on boosting capital spending and growth rather than welfare spending. In short, the government is hoping that growth will address the issue.

Budgetary numbers show this clearly. The 2021-22 (BE) allocation for MGNREGS is ₹73,000 crore, compared to an allocation of ₹1.12 lakh crore in the 2020-21 Revised Estimates (RE). This seems to be a cut in real terms even from the 2019-20 allocation of ₹71,687 crore.

Similarly, allocation for National Social Assistance Programme, which was increased to ₹42,617 crore in 2020-21 (RE) from the 2020-21 BE allocation of ₹9,197 crore has been brought down to ₹9,200 crore in the 2021-22 BE numbers.

PM-KISAN, this government’s flagship scheme for boosting farm incomes actually saw a decline even during the pandemic. Against a 2020-21 BE allocation of ₹75,000 crore, the RE number for 2020-21 is ₹65,000 crore, which is also the allocation for 2021-22 BE. The government spent ₹3.4 lakh crore in food subsidy payments to the Food Corporation of India in 2020-21 according to the RE numbers. These cannot be compared with the 2020-21 BE numbers, because the government has rightly discontinued the practice of treating this spending as an off-budget item. However, this too has been brought down to ₹2 lakh crore in the 2021-22 BE allocation. An analysis of spending on important pro-poor heads such as agriculture, social welfare, housing for poor (Pradhan Mantri Awas Yojna) have also seen a decline in 2021-22 BE allocations compared to 2020-21 RE numbers.

The macro takeaway from these statistics is clear. While the government did spend more than what the last budget allocated to this heads, it has decided against continuing its distress relief push in the next fiscal year as things return to normal.

Instead, the spending push has been reoriented towards capital spending, by which the government hopes to boost growth in days to come. This clearly suggests that the government is pinning its hopes on the ongoing economic recovery to take care of those at the bottom of the pyramid.

Union finance minister Nirmala Sitharaman explained this in an interview. “The balance (between welfare and capital spending) is expected to get reset largely by the fact that the money is going only for capital expenditure. When you create windows for capital expenditure, you’re confident that what you’re spending money on is actually asset creation,” Sitharaman said.

“Therefore, the kind of money going into the hands of the people directly, without looking at what it’s going to create — it will create short-term demand, yes — but when it goes through this [asset creation] route, it also gives encouragement for sectors that will help create better roads, ports, other infrastructure facilities. Thus, it’s both a short-term and long-term impact,” she added.

Not everyone is convinced.

“Cutting back on welfare spending at a time when labour markets are in distress and the poor are still dealing with the loss of incomes and livelihoods, and more importantly a wage squeeze due to the pandemic, will only worsen the demand problem in the economy,” said Himanshu, associate professor of economics at Jawaharlal Nehru University.

“There is enough evidence to show that the sequential recovery in the economy was driven by profits, even as employment and wages took a hit. A reduction in welfare spending will increase the burden on the poor and erode their bargaining power in the economy, which will generate headwinds for rural demand going forward,” he added.

High-frequency indicators seem to paint a mixed picture. The Purchasing Mangers’ Index (PMI) for manufacturing in January 2020 was reported at 57.7, significantly above the threshold of 50 which signifies an improvement in economic activity over the previous month. This rise in production notwithstanding, employment went down for the tenth consecutive month, although the pace of decline in employment continued to moderate.