At the beginning of this financial year, finance minister Nirmala Sitharaman declared that this union budget would be something that “has never been seen before” in a hundred years. Given that the world was tackling and adjusting to the ravages of the COVID-19 pandemic that was inflicting widespread economic damage. The lockdown ceased most of the economic activities, repercussion of which were in the forms of unemployment and very low output. There was a general trend of low investment before the pandemic and the loss in demand only worsened the situation. Projects turned NPA’s and bank balance sheet deteriorated. This constrained banks from giving loans even with RBI creating liquidity in the system. In face of these condition, general policy prescription was keeping the fiscal policy loose. The counter cyclical action could mostly be done by expansion of government expenditure. Thus, the significance of the budget rose considerably and it was viewed as an instrument that could provide relief and lead the country towards the path of recovery.
Although the government has not opted for aggressive spending, the finance minister attempted to deliver on the promise of recovery from recession, by focussing on using fiscal stimulus. Additionally, the revenue collected in FY2020-21 were lower than estimated and future projections for revenue more conservative since the economy is in a phase of recovery. The constrained revenue pool and pressing needs for expenditure made it necessary for the government to borrow to spend. Thus, this budget appears to be debt-funded as most of the heavy lifting has been done by expanding the governments balance sheet. However, higher borrowing may push up interest rates and turn inflationary which could dent investment and may prove to lower growth.
With India’s vulnerable position with rating agencies and international market the government instead kept focus on a gradual fiscal consolidation in line with the recommendation of 15th Finance Commission. This decision, however, could prove to be costly affair for India. The plan charted out by the 15th Finance Commission indicates the possibility of the base-effect induced bounce wearing off. Nominal GDP growth is expected to slow down from 14.4 per cent in 2021-22 to 9.5 per cent in 2022-23 — implying a real GDP growth of only around 5 per cent. Given that economic growth had slowed down before the pandemic, the calls for government spending at that point in time were unmet and it is a possibility that by the time growth recovers, the effects of a second round of weak balance sheets of corporates and income losses might work their way into the system. Thus, premature consolidation might hamper growth prospects and end up being counterproductive for debt and growth sustainability.
Given that debt funding was constrained the government plans to generate non-tax revenue through disinvestment and monetisation of assets. Disinvestment plays a pivotal role in the budget which targets to raise INR 175 thousand crore. This target is slightly less than the target for the previous union budget. However, the target seems more achievable and may emerge as a key source of revenue in the coming financial year. This disinvestment will be attained through privatization that might attract prospective buyers and make public sector undertaking (PSU) more efficient. Additionally, The government has decides to privatise two public sector banks and one general insurance company is a significant structural reform towards garnering more efficiency into the system.
Moreover, various ministerial projects and sector-based allocations have been prioritized in the new budget. But expenditure on subsidies were cut and expected direct cash transfer were missing from the budget. Further, with the tax brackets remaining the same, attempts have been made to reduce regressivity and increase efficiency in tax collection. But as surcharges and cesses have assumed a more important role in the central tax system and various cesses such as a health cess and an agriculture infrastructure and development cess have been announced revenue for centre is being generated on brackets allocated as a share of federal taxes. Levying these have been criticised as they are not part of the divisible-pool of taxes. Given the stress on state finances, even with vertical devolution kept at 41%, the taxes were not increasing commensurate to the total central tax. With sectors like health care becoming a key area of expenditure, there is an ongoing debate of reduction in centrally sponsored schemes and more revenue to states in its place. This would allow for more discretion and presumably efficient allocation.
Other key expenditure of the government is the investment in infrastructure. This is expected to provide income opportunities and allow for consumption to recover. Along with these two institutions have been proposed to be set up– Asset Reconstruction Company Limited and Asset Management Company and bad bank, were created to manage the stressed balance sheets of the banks. This will allow banks to give loans and increase investment in the system. This would create a cycle of employment creation, consumption demand increase and further investment leading to higher growth potential.
Therefore, to summarize, the focus of the budget lied on increasing expenditure to revive growth. Adherence to the implementation of counter cyclical fiscal policy tax rates remained the same and various measures of disinvestment were taken. Monetizing assets was another step taken to raise the resource pool and was primarily done to increase consumption which in turn may increase investment and create more jobs. Lastly, to keep the interest rate and inflation from increasing, a fiscal consolidation pathway was specified that targets a time period of three years; this was done to keep debt sustainable and to keep the outlook of international markets and rating agencies favourable. However, experts are far from satisfied with the measures taken by the budget and are sceptical about its sustainability. Hopefully, the unravelling of the financial year may align with the predictions made by the government, or cast more doubts on India’s financial future.
This article is coauthored by Aliva Smruti and Arundhati Rajan. Alivia Smruti is a third year student of Economics and Arundhati Rajan is a second year student of Economics