The Union Budget 2021 is being widely considered a pivotal point in the country's economic and social recovery from a deadly pandemic that battered incomes and disrupted countless lives.
Finance Minister Nirmala Sitharaman, who will deliver the budget on Feb. 1, has the daunting task of reviving an economy that was floundering since before the coronavirus struck while manoeuvring through the various new challenges that have emerged due to the pandemic-led lockdowns.
With India’s flagship employment scheme failing to keep up with the demand for jobs, farmers protesting on the streets and wealth inequality getting more stark, Sitharaman’s economic package will be closely eyed by the country.
Economists and market observers have noted that the budget will be a fine balancing act between stimulating long-term growth while also keeping government finances in check.
Here’s what you need to know about Union Budget 2021:
Spending Vs Deficit: A Tightrope Walk
Most economists are unanimous in their view that India needs to prioritise growth by spending more.
The Indian government needs to stimulate growth and push for job creation through a spending boost. Credit Suisse’s Neelkanth Mishra noted that the government is also willing to spend more as most Covid-19-related restrictions have been removed. This would mean that the growth multiplier for every rupee spent would be higher now, it said.
Conventional wisdom, however, would suggest that higher spending can lead to a wider fiscal deficit. But nothing about this year’s budget is conventional. J.P. Morgan’s Sajjid Chinoy and Toshi Jain, in a recent note, argued that it is possible for the government to deliver a budget that expands spending while simultaneously reducing the headline budget gap.
J.P. Morgan’s analysis said that with GDP expected to rebound sharply in the coming fiscal, some of the tax revenues that were lost in the last two years can be recovered. If that is combined with a successful asset sale program by the government, then the expenditure can be increased while keeping the deficit under control.
Credit Suisse agrees. It said that even accounting for a lower fiscal deficit, the budget can expand spending by 20-21% over the current fiscal. Increasing expenditure will also have a positive knock-on effect, it noted. “Higher spending would further boost growth and thus tax receipts as well.”
Besides the government cannot afford to withdraw fiscal support as large parts of the population—mostly at the middle and bottom of the economic pyramid—have been hit the worst by the pandemic.
India’s relief package during the Covid-19 pandemic has been relatively small compared to other countries. And low fiscal spending has its costs, according to HSBC Global Research. “Low fiscal spending could leave behind other scars like inequality, which in turn could hurt the sustainability of growth,” it said. The budget can prioritise on fixing that.
The Worries On Fiscal Deficit, Debt Levels
Still, the government will need to keep long term debt sustainability in mind. With the country’s debt-to-GDP ratio likely to hit close to 85% in FY21, an attempt will need to be made to bring that down. That means a steady decline in the fiscal deficit will need to be targeted.
The budget gap in the ongoing fiscal is expected to rise to 6.5-8% of the GDP. For the next fiscal, the government is expected to target for a deficit of around 5.6%, according to consensus of estimates.
This will mean, according to a median forecast of 15 analysts surveyed by Bloomberg, the government could announce a borrowing plan of Rs 10.6 lakh crore. That’s lower than the record Rs 13.1 lakh crore in this fiscal, but 75% above the previous five-years’ average.
Fiscal consolidation and fiscal credibility should be the two priorities for FY22, according to a pre-budget note by QuantEco Research. The note argues that wider the deficit gets, less is the space to spend on discretionary policies. That also hurts India’s sovereign ratings.
Sharp increase in deficit and debt levels could potentially endanger future growth potential.QuantEco Research
India already has one of the highest debt-to-GDP levels among emerging market peers. If it increases government borrowings then it risks crowding out the private sector, Barclays India said in its pre-budget note. Increasing debt also means less room to spend on social welfare in the future because a major chunk of the budget will then go towards servicing the debt, it said.
Kotak Economic Research said that the government should provide a credible consolidation map to bring down India’s public debt. The Centre and the Reserve Bank are already trying to encourage the participation of foreign portfolio investors in India’s debt issuances. Hastening inclusion in bond indices would spur passive flows and reduce the burden on market borrowings for meeting government’s financing needs, it said.
Divestment: Key To Bridging The Budget Gap
Beyond taxes, the government’s major source of revenue comes from selling assets. Over the last few years, Prime Minister Narendra Modi’s administration has been trying to conduct asset sales of state-run companies with a broader objective of more privatisation in the economy.
And as the budget gap has widened, the divestment targets have become lofty to make up for that deficit. In last year's budget, the government set a divestment target of Rs 2.1 lakh crore. So far, it has only been able to garner Rs 19,499 crore.
HSBC Global Research said that the government’s divestment plans were derailed in FY21 due to the Covid-19 pandemic. But that could change this year. “Given the buoyant capital markets, the government could accelerate its disinvestment drive and use funds for public capex,” according to HSBC Global Research.
J.P. Morgan, too, mirrored this view. “An expansionary consolidation is possible if authorities double down on asset sales and are able to significantly ramp up spending run-rates in FY22.”
For the budget math to work, asset sales will be absolutely crucial in FY22.J.P. Morgan
However, it cautioned that if asset sales that are budgeted do not materialise, then the government will have to cut down on its spending. And that won’t be optimal for economic momentum.
QuantEco said that most of the asset sale targets are already recognised. And hence divestment is a low-hanging fruit for the government to boost revenue.
Barclays said that there is significant potential for selling stakes in public firms including Bharat Petroleum Corporation Ltd., Life Insurance Corporation of India and IDBI Bank Ltd. (all three have been previously announced). It expects the divestment target to be set around Rs 2 lakh crore for the next fiscal.
Where The Government May Spend
Besides the challenge of balancing its budget with fiscal rectitude, another challenge is the efficient allocation of funds. That is even more relevant this year with the economic damage caused by Covid.
The government will likely continue to funnel sizeable resources into welfare schemes, particularly around employment guarantee, affordable housing, health, education, sanitation, agriculture, and rural development, according to Nomura’s pre-Budget note. It will also have to increase capital expenditure to enhance medium-term growth, it added.
Higher capex will also be key in creating more jobs, which is should be top of the priority list, according to HSBC. Investment raises an economy’s capacity to create jobs, it said. “But it may not come easily at a time of low-economy wide capacity utilisation. Public capex and reforms may have to take the lead.”
Barclays India, however, argued that the funds used for emergency relief during the pandemic should now be redirected towards capex and manufacturing-focussed programmes like Atmanirbhar Bharat. “Over the coming years, we believe the government is likely to channel those funds toward capital expenditures, which tend to provide a larger boost to growth.”
The financial sector will get significant focus too. The government is expected to recapitalise public sector banks to stimulate credit growth, Phillip Capital said. It is also considering setting up a bad bank for resolving non-performing assets, an announcement which could find a place in the budget speech.
HSBC asserted that strengthening banks is a must. That’s because a combination of rising inequality and risk-averse banking system—as Indian lenders become cautious about who they lend to—could stunt medium-term growth, it said.
Continued welfare spending is also needed to support those at the bottom of the pyramid. “From a longer-term perspective, we hope the government starts looking at providing a social security net through urban employment schemes or partial basic income,” Kotak Economic Research said.
Kotak’s economists made a case for higher expenditure on sectors like health and education, where India’s outlay has been lower than that of other countries.
Other Expected Announcements
The government is said to be considering a plan to set up a bank with equity capital of Rs 1 lakh crore that would be used to fund port, road and power projects. The existing India Infrastructure Finance Co., which has a corpus of Rs 2,000 crore, will be merged with the bank.
The budget may also see the finance minister relax rules for foreign direct investments in the country’s construction sector. The proposal under discussion allows limited liability partnerships to invest in the construction of townships, roads, hotels and hospitals.
Sitharaman may also announce a Rs 3 lakh crore plan to ensure piped water for every household in the next five years. The plan is likely to be part of Modi’s Jal Jeevan mission.
Another announcement worth Rs 3 lakh crore may feature in the budget to revive regional electricity retailers. The spending would focus on upgrading the infrastructure and technology of the ailing power utilities and plug leakages.
Higher levies on a range of imported goods is also a proposal being considered as Modi’s government attempts to boost local manufacturing.
Big Budget Numbers To Watch Out
Watch | BloombergQuint’s Ira Dugal explains the numbers to watch out for, and the math behind them.
Budget Must Reads
- The Union Budget 2021 is a pivot point for India, writes Krishna Memani.
- HDFC’s Keki Mistry writes on how the budget can construction the post-Covid economy.
- Dear FM, listen to a ‘fiscal heretic’ and cut taxes, writes Raghav Bahl.
- EY’s Pranav Satya on a comprehensive tax plan that can foster growth.
- Shankkar Aiyar makes the case for taxing stock market gains of billionaires.
- “You need Atmanirbhar financial services for Atmanirbhar India,” says Sanjiv Bajaj.
Research Reports
Motilal Oswal: Budget 2021 - Expect Limited Fiscal Support
Axis Securities: Budget 2021 - Policy Reforms Likely To Continue Even With Limited Fiscal Space
KRChoksey: Budget 2021 Expected To Focus On Consumption; Revival Of Private Sector Investments
ICICI Direct: Budget 2021 - Revving Up Growth In Top Gear
Nirmal Bang: Budget 2021 Will Aim For A Booster Dose For Growth
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