What Sitharaman says, she delivers

Before announcing the Union Budget 2021-22, Indian Finance Minister Nirmala Sitharaman made a bold statement that this budget would be ‘a budget like never before’. And after the 1st of February, it looks like she is planning to stand by her statement. With ideas to boost  expenditure in the economy along with the willingness to push the Fiscal deficits and a positive intent to reform the economy, this budget is in fact quite bold compared to the budgets in previous years. This article, thus aims to assess the budget in 4 segments, Health and Wellbeing, Fiscal activism, Income Tax rates and Privatisation.

Health and Wellbeing

After Covid-19, which took around 1.5 lakhs lives in India, it became a necessity for the government to focus on the development of Healthcare infrastructure. Hence, they came up with a new scheme called ‘PM AtmaNirbhar Swasth Bharat Yojana’, under which there would be a total expenditure of ₨ 64,180 crores over the span of 6 years. This sum would be used for strengthening the existing healthcare institution and creating a new institution for the detection and cure of new emerging diseases. Further, a total sum of Rs 35,000 crores has been allotted for the distribution of the COVID-19 Vaccine across the country. In addition to that, plans such Jal Jeevan Yojana and Swachch Bharat, Swasth Bharat 2.0 would be implemented for over 5 years between 2021-2026. This sums up to a total of Rs2,23,846 crores, which, against the last year of budget estimate, shows an increase of 137%.

Such a high increase in the investment of Healthcare sector has many benefits. Covid-19 was a wake-up call for India as it highlighted the poor standards of the public healthcare system. With hospitals running out of ventilators, space for accommodation, etc  such a big investment became a necessity to ensure that if a situation like the pandemic occurs again, the nation would be better equipped to handle the crisis.

 Secondly, an improved healthcare and nutrition would result in higher productivity of the labour, and fewer absentees. This pushes the economy towards the PPF(Production Possibility Frontier)  as there would be an adequate distribution of resources among the labour and with higher efficiency, the total output of the nation could increase. Also, with increasing investment in hygiene and sensitisation, the living condition would improve. This  could lead to fewer people falling ill. So, the financial resources which were initially allocated for the use of treatment of ill health, they could be used elsewhere. Hence, such investments would aid the economy in the long run.

Fiscal Activism

In 2020, with strict, nationwide lockdowns, production had fallen massively hence, India experienced a huge decline of 23.9% in GDP in the first quarter of 2021. The government was heavily criticised for not providing enough fiscal support last year. However, this decision of the government was justified. As most of the economic activities had stopped due to the lockdown, there was a general trend among the private sector to cut on their expenditure and save more as a precaution. Hence if the government had increased its investment back then, the final results would have been disappointing due to smaller multiplier effects. Hence the opportunity cost to expenditure increased and with this in mind, the government decided to keep it’s spending at moderate levels.

However, as the COVID-19 condition relatively improved, with the economy returning to its previous levels of activities, the opportunity cost to public expenditure lowered as now, there would be greater multiplier effects. Hence, the government decided to increase its expenditure through debt financing. Their prime focus however, is on capital expenditure. In the year 2021-2022, the capital expenditure is set at Rs 5.54 lakh crores, which shows an increase by 34.5% against the year 2020-2021.

The benefit of increasing capital expenditure is twofold. Firstly, it increases aggregate demand in the short run. As public expenditure increases, it creates job opportunities in the economy. This means that demand for the labour would increase, which in turn would increase the incomes offered by companies. Hence, as the disposable income increases, consumer’s purchasing power also increases; they could consume more products with their income, the aggregate demand in the economy increases.

 Secondly, this increases the aggregate supply in the long run. As there is an improvement in infrastructure, the collective efficiency along with the labour increase, which in turn results in decreasing costs of production. As the cost of production falls down, the companies are left with extra finds which they could reinvest in the firm to increase their output. For example, with increasing investment in Road Infrastructure, the transportation cost to a company may reduce and so, they could utilise these extra financial resources by investing them back in the company to increase the production levels. Also, as the investment in Road infrastructure increases, this creates jobs(labour required for the construction of roads) which, in turn, increases the aggregate demand.

Further, these higher government expenditures could also aid the confidence of investors in the economy, which could have positive results like increase of private investments. This decision, may not show immediate results, however, in the medium to long run, it helps in recovering the growth of the economy by making the growth more sustainable.

Income Tax rates

The people of the nation would have been very relieved after the budget for the financial year 2021-2022 was released, primarily because there was no change in income tax rates. This stability of tax rates helps both, the consumers as well as the government. As the tax rates are expected to remain at a constant rate, it helps consumers in planning their future expenditures. If the tax rates were changing every financial year, they would keep some money as a buffer to counter those changes. However, now they have confidence that the tax rates are not going to change and, might prefer to invest some portion of that money which, aids to the growth of the economy. Moreover, income tax rates were changed just last year. So, if the government decides to change them again this year, they would not be able to notice the effects of those changes adequately. By having a stable tax rates over a period of a few years, the government would be better equipped to judge what rates would be better for the economy.

Privatisation

The decision to privatise two public sector banks and one general insurance company was another major highlight of the budget. The government has been employing strategic disinvestment in past but had only privatised one bank. This decision, would improve the efficiency of those banks. Since they were supported by the government, they had little competition which made them inefficient. However, now they will compete with other banks on equal grounds, they would have to be more efficient in order to survive. Furthermore, this would result in extra revenue for the government. This revenue, consequently could be used for the increased public expenditure such that, the government would end up borrowing less than they would have. Hence this could be used to control the fiscal deficit to the estimated rate and the government would save up the extra interest that they would have to pay on these extra borrowed funds.

Conclusion

The budget shows that there has been a significant increase in public expenditure. However, with constant and relaxing tax rates, the gap between the expenditure and revenue is going to increase, even if the government might try to offset it by privatising some Public Sector Enterprises. Therefore, for the year 2021-2022, the fiscal deficit would exist at 6.8% of the GDP and only by year 2025-2026 it is estimated to reach the fiscal deficit level below 4.5% of the GDP. This proves that the government is preferring growth recovery over the medium run.

 Though it may look like that this fiscal deficit isn’t a good thing for the economy, it is the only option to counter the unpredictable economic turmoil that Covid-19 created. Public expenditure here acts like a trigger which would activate the private investments, FDI, etc and irrespective of the costs, it is an essential tool for recovering the economy.  As the economy just begins to pick up the pace, the timing of this budget and these investments is spot on making this budget unique to others. This thus incites hope, that economy would not just  return to the pre-pandemic stage, but rather become better than that.

Hemang is a Second-year student at Ashoka University majoring in Economics and Finance.

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