Budget 2021: Government Spending Priorities In A Post-Covid Year

There’s never enough money to spend on everything you want to. That’s as true for household budgets as it is for government accounts. The dilemma of where to spend will be particularly acute this year as the government reviews the economic damage left behind by the Covid-19 crisis.

While the economy has rebounded after a near 24% contraction in the April-June 2020 quarter, economists say that government spending support is essential to the economy given the labour market scars left behind by the crisis. While most economists recommend higher government expenditure as a percentage of GDP in 2021-22, BloombergQuint asks where that spending should be directed.

First, Spend More!

India’s pre-Covid slowdown had already persuaded the Finance Minister and her advisors that there was too little fiscal space for any effective relief package, said Ashok Kotwal, Professor Emeritus of Economics at the University of British Columbia in Vancouver and editor-in-chief, Ideas for India. This was a serious mistake and my first priority would be to rectify it, he said.

“I do believe that these are exceptional times and without a substantial relief package, not only would we dump an unsustainable burden on the most vulnerable population but slow down the recovery by aggravating the demand collapse”, Kotwal said. The organised sector will not invest in expanding output if they expect no additional demand emerging in the next period, he added.

Kotwal suggested a substantial increase in spending on the rural economy.

Spending priorities should include rural infrastructure that would create incentives for farmers to diversify toward horticulture, dairy, poultry, flowers and other things that the urban consumers are likely to spend their income increases on... This would create resonance between rural and urban demand.

Ashok Kotwal, Professor Emeritus of Economics, University of British Columbia

Also Read: Budget 2021: ‘Sugar Rush’-Led Revival May Still Need Government Spending Support: JPMorgan’s Sajjid Chinoy

Prioritise Health

The complete recovery of the economy remains conditional on controlling the pandemic and ensuring that there is no resurgence in future. As such, for the short term, substantial expenditure on health, including what is needed for large-scale vaccination programs, should be prioritised, said Sabyasachi Kar, professor at the Institute of Economic Growth.

Kar recommended budgeting for unforeseen expenditure, such as resurgence of the pandemic and the consequent need for support to poor households. Kar added that the pandemic has exposed the limited capability of our bureaucratic apparatus to effectively carry out governance during disruptions. This must be a medium-term focus.

A focus on creating better governance capacity is important for both growth and any future shocks. The budget should initiate a long-term plan for bureaucratic capacity creation and fund it on a recurring basis.

Sabyasachi Kar, Professor, Institute of Economic Growth

In the medium term, the biggest impediment to a return to higher growth path is low investment rates, Kar said, adding that the budget should address this by investing in infrastructure.

“The public investment-to-GDP ratio of the Central Government has to be pushed up to 3% as envisaged in the original FRBM act. Since public investment has high multiplier effect, it will also help demand growth.”

Focus On Food & Nutrition

There is a need for a big boost to expenditure on food and nutrition, especially for children from poor families, said economist Indira Rajaraman.

During the pandemic, the integrated child development scheme, which operates all anganwadis, was closed. That deprived nutrition to a very vulnerable section of our population. Alongside, the mid-day meal schemes were also absent.

“This denial of food to infants and expectant mothers has been devastating in terms of the potential impact it will have on the nutritional status of children and mothers,” she said.

While the increase in household entitlement to food supplies via the public distribution system replaced both to some extent, it did not do so fully, making the urgency of restoring food and nutrition to pre-school and school-going children paramount, Rajaraman said. If food is sourced locally, it will dovetail into enhanced farmer income, especially if they are given an assurance that their output will be bought.

Also Read: Budget 2021: Consider A Mid-Year Fiscal Deficit Reset In FY22, Says Indira Rajaraman

Build Social Protection Systems

This is a budget for accelerating relief and kick-starting recovery, said Yamini Iyer, president and chief executive of the Centre for Policy Research. That would require us to look at fiscal rather than monetary stimulus and push hard on social protection expenditure and public infrastructure expenditure, she said.

India’s social protection systems are relatively resilient in rural areas but extremely weak — to the point of being non-existent — in urban areas, Aiyar said. The pandemic should put to rest the debate on whether we need social protection. “While the form is a matter of debate we must keep in mind universality and decentralization.”

However, social protection cannot be approached with a one-size-fits-all perspective in India. Currently social protection is extremely centralised, with the union government not providing enough fiscal support to states for designing appropriate social protection programmes.

What India really needs is a basket of core social protection instruments both preventive and promotive. Preventive measures to set a floor and and promotive to strengthen savings, enable social inclusion in times of crisis and provide a long term cushion.

Yamini Aiyar, President & Chief Executive, Centre for Policy Research

Boost Consumption

While many suggestions surround the need to raise government spending, a boost to the economy could also comes if the government supports consumption.

Boosting consumption at this stage may help more to redress temporary income losses, provide a short-term uplift and inject hope in the private sector, said economist Renu Kohli.

Considering recent unemployment figures, along with the continuing high demand for work under MGNREGA, the government can frontload welfare spending in the short term. The government can choose to mix current spending with capital spending, Kohli said. Spending on public healthcare, for instance on building hospitals and recruiting medical manpower, could also help,

However, the yield to demand facilitation, puts the focus squarely upon the budget setting framework or the FRBM Act, the contemplated debt dynamics relative to output gap, and foreseen inflation in next 2-3 years. “A greater expenditure-to-GDP ratio depends on how these elements are viewed evolving ahead.” said Kohli.

Also Read: Budget 2021: Dear FM, Listen To A ‘Fiscal Heretic’, Cut Taxes!

Recapitalising Public Banks

The upcoming budget will have to include a bank recapitalisation program to just keep smaller public sector lenders afloat, said Abheek Barua, chief economist, HDFC Bank.

The RBI is not very comfortable with the deep discount bonds tried recently with PNB, because there is no interest flow to the banks who subscribe to these bonds, he said.

A middle ground will have to be worked out by issuing recapitalisation bonds [to PSU banks] and also allocating a certain amount of direct equity infusion in the budget to the stressed banks under very strict conditions, some of which are reasonably well recognized and entrenched.

Abheek Barua, Chief Economist, HDFC Bank

There are a number of other spending priorities for the government to consider.

The pandemic has reinforced the need for supply chains, Barua said. Not just roads but all kinds of things, for instance refrigeration facilities, freight corridors, railway track expansion. The vaccination program will expose a lot of these gaps in the supply chain. What the government can do is look at infrastructure from from the supply chain perspective, Barua said.