Monday’s union budget was presented under severe circumstances.
The National Statistical Office estimates that our Covid-impacted economy will contract by 7.7% in the current fiscal year 2020-21. Even this understates the true extent of distress amongst our micro, small and medium enterprises, and amongst contact-based services.
Thankfully, we have (so far) avoided a second wave of Covid-19, and economic activity is rebounding—witness the encouraging Goods and Services Tax collections of a record Rs 1.2 lakh crore for January 2021. But our economy—which was structurally weak even before Covid-19 hit us—needs to be nursed back to full health, before we can achieve our economic potential.
Against this backdrop, we evaluate the 2021 budget on three parameters. First, on the credibility of the budget math. Second, on its potential to deliver what India ultimately needs—adequate growth in domestic output and jobs. Third, on the manner of raising resources.
The Credibility Of The Math
This budget scores very high marks on credibility. For too long now, our budgets have resorted to accounting smokescreens that masked the true extent of our fiscal imbalance. Thus, revised estimates of revenue receipts would invariably be unrealistically high, only to be brought down sharply later. Likewise, with the cash accounting that our governments follow, government expenditures would be brought down by simply not releasing payments. Instead, entities such as the Food Corporation of India would be ‘encouraged’ to borrow outside, in lieu of dues from the government. As a result, against the FY20 revised fiscal deficit estimate of 3.8% of GDP presented in last year’s budget, shorn of accounting jugglery, the true deficit is estimated at 5.4% of GDP.
This year, the finance minister has largely come clean on the budget math. She has declared much higher than expected fiscal deficit numbers of 9.5% of GDP and 6.8% of GDP for FY21 and FY22, respectively. In doing so, she has put up realistic estimates of revenue receipts and recognised ‘off-balance sheet’ expenditures. She has also likely released pending government dues to both the public and private sectors.
This truth augurs well on several fronts.
- First, with realistic revenue budgets, the pressure on tax authorities to engage in tax terrorism should subside.
- Second, the government can now release its payments and refunds on time, easing a financial bottleneck that has dogged us for a while.
- Third, a focus on the ‘real’ numbers should allow for a better-informed debate on ways to improve our fiscal balance.
Hopefully, our state governments will also follow this example of providing credible budget math.
Domestic Output And Jobs
The budget also scores well on its potential to create domestic output and jobs—critical for achieving durable growth, controlling inflation, paying down our high public debt, and ensuring external balance.
While expenditure for FY22 has been maintained at the elevated levels of FY21, there is a shift away from revenue expenditures—the regular payments towards items such as administration, interest, and subsidies, that are arguably less productive—towards productive investments. Capital expenditure in FY22 is budgeted to increase by 26% over FY21, with a focus on areas such as infrastructure, roads, and textile parks.
Alongside a promise to deliver more on health, education, nutrition, and urban infrastructure, these complement ongoing efforts to foster domestic jobs and output, including reform of labour laws, corporate tax rate cuts, and production-linked incentives.
There are also efforts to revive our stressed financial services ecosystem. The Finance Minister announced the creation of a government asset reconstruction company, or ‘bad bank’, to warehouse some of the large non-performing assets that permeate the industry. She also announced the creation of a new development financial institution to facilitate and fund infrastructure investments. While in principle, these are welcome ideas, much depends on how the modalities are structured and on their execution. We await clarity on this score.
Funding The Deficit
The budget focuses on raising funds via disinvestment and asset sales, rather than via additional taxes. Again, I commend this choice. While the wealthy can perhaps pay more to fund our deficit, we should avoid endangering our fragile economic recovery from Covid-19 with any additional tax burdens.
The Long Road Ahead
While the budget has delivered on truth and held out some potential for the creation of domestic output and jobs, there is still much to be done.
Several sectors of the economy are still reeling under chronic stresses—including pockets of financial services, power, real estate, telecom, airlines and shipping, contact-based services, and micro, small and medium enterprises. Any path to a recovery in domestic output and jobs will have tackle these stresses.
Likewise, it would be a mistake to assume that a revival in consumption and government spending would automatically result in durable growth.
After the global financial crisis in 2008, we saw a strong revival in consumption, government spending, and investments. However, we failed to deliver adequate growth in domestic output and jobs. The result was any central bank’s worst nightmare—high inflation, high imports and external imbalance, inadequate real growth, inequity, and fiscal imbalance. All this finally culminated in financial instability, when the Federal Reserve taper tantrum hit us in mid-2013.
The onus is now on the real economy and the government to avoid a repeat of history, to focus on execution, and to deliver on adequate domestic output and jobs. The road ahead will be long and hard, but for today at least, the finance minister has delivered.
(Editor’s note: This was the picture on public finances last year, as Ananth Narayan saw it: Satyameva Jayate – Our Experiments With Truth)
Ananth Narayan is Associate Professor - Finance at SPJIMR. He was previously Standard Chartered Bank’s Regional Head of Financial Markets for ASEAN and South Asia.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.
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