[ Shri Prakash & Samit Sharma ]
It is the first budget amid the Covid-19 crisis, declining growth rate quarter by quarter during the prolonged lockdown, loss of jobs by home returning migrant workers and increased expenditure on health care services to cater almost exclusively to Covid cases. Loss of jobs and income resulted in loss of demand for manufactured goods and services in general and consumer durables in particular. ‘Dissaving’ also adversely affected investment.
The budget attempts to put the economy not only back on the rails but also to provide momentum to growth. The budget 2021-22 is characterized by several innovations as it departs from earlier budgeting conventions. This budget is the brightest of the six budgets of the Modi- era. A closer look at the budget shows some hits and some misses.
# New Growth Model
Most important feature of this budget is that it is the first ever budget based on “Vakil-Brahamananda’s basic needs and infrastructure model” in general and human capital growth in particular. Besides health care, the budget also seeks to boost nutrition, food, hygiene, sanitation, and partly education. Agriculture and road infrastructure are the second most important priorities of the budgeted expenditure.
# Tax Neutrality
This is another feature of the budget in so far as no new taxes have been imposed and rates of taxation are kept constant, except the agricultural cess on diesel and petrol and countervailing reduction of customs duty on the same for keeping retail prices of diesel and petrol constant. However, diesel/petrol and LPG prices have already increased due to rise in international prices which have been neglected in the budget.
# Higher Expenditure?
The increased spend is marginal as it equals the spending in 2020. It is understandable since revenue receipts have been adversely affected by decline in GDP in 2020-21. Even if the projected14.5% GDP growth target is met, it will only equal India’s annual GDP rate of approx. $.3Tr if exchange rates remain stable. This will equal India’s past trend growth rate which will put Indian economy on its growth trajectory. This equality of rates is explained by the lower denominator of growth rate of 2021-22 which is much lower than that of 2020-21.
# Investment effect
Proposed investment will create new jobs and generate income, which will activate consumption multiplier and will supplement the investment accelerator. Consumption multiplier and investment accelerator are the two basic pivots of growth. Demand recession accentuated by loss of jobs and incomes during Covid crisis will be mitigated to great extent.
Total budgeted expense in all directions is approx. Rs 34.5 lac cr. However, inadequate funding for Education (in view of NEP, Defense (twin Sino-Pak challenges), Police (prolonged protests) and Judiciary is a miss. Some allocation for infrastructure might not fructify fully. But government spend on infrastructure will positively impact capital goods sectors some of whom are in the debt crisis, especially the energy sectors which need to square off debt. This is good deleveraging for the long term balance sheet cleanup of the corporate sector though it will not shore up demand for sectors struggling with excess capacities due to demand recession.
# Fiscal Deficit
The budget also diverges from the conventional wisdom of keeping fiscal deficit around 3-4 percent as the proposed deficit is about 6.5%. Incidentally, fiscal deficit need not necessarily be inflationary if investment in quick returns yielding sectors is financed through fiscal deficit. However, jobs and incomes are created by investment almost instantly while output materializes with lags. Therefore, it is imperative that investment is channelized into food production, including output of agro-based industries, low priced manufactures which are demanded by low to low-middle income groups.
During the Covid crisis, demand for such goods as ginger, garlic, turmeric powder, amla juice, alovera and giloy juice, etc, significantly increased as goods preventing Covid. So, rapid growth of output of such goods has to be ensured.
Infrastructure development accelerates output of goods used as inputs through backward linkages while it exercises long term growth impact through forward, backward and consumption linked linkages in the long run. However, if the government spend falls below projection, a dip in GDP is likely to occur, given the headwinds facing the economy. Cost of capital might go up marginally and thus crowd out some capital expenditure in future via interest payouts on debt. Ignoring the rating agencies is welcome but it could raise the cost of capital, including a higher cost of servicing debt.
The budget is likely to be inflationary by and large. Road, rail and infrastructure investment involves long gestation periods and even otherwise these projects help in generating additional incomes and jobs indirectly. Prudence requires control over wasteful and non-productive public and efforts to enhance efficiency and productivity to accelerate growth to control inflation on the other.
# Financial Sector Risks
NPAs, bank failures, no/ low corporate debt advances, consumer financing risks with respect to rising petrol prices, high interest rates, could put pressure on banks top and bottom lines.
# Interest Rates
Despite interest rates being kept constant by RBI, inflationary trends with rising petrol prices (aided by high taxes imposed by GOI & States), high fiscal deficit (increasing the cost of capital) and Covid ravaged external environment will persist.
# Divestment & Resource monetization
White elephants like Air India and LIC’s IPO can create fiscal headroom for the future. The LIC IPO is interesting with an issue size of Rs 90 bn. The company has assets equivalent to $450 Bn (Rs 31 Lakh crores) & Revenues of $80 Bn (Rs 6 Lakh crores) & a net income of $.5bn (Rs 3700 cr), approximately. If it’s valued at $100 bn, selling 20% should fetch the government Rs 1.5 lakh crores ($20Bn). 5G/4G, a coal block auctions can also raise necessary resources.
# Indirect Taxes
GST collections due to a stricter regime for tax collections and identifying fraud might help the government get anywhere close to its target of Rs 22 lakh crores of tax receipts in 2022 FY.
# Direct vs Indirect taxes:
Why a tax rebate was not given for tax payers who paid more in 2020 compared to 2019 with a thank you note by from MoF? Why the corporate tax rates match the best in the global rates but no such matching reduction has been made for the direct tax rates.
# GDP Growth
On the whole, the budget will be growth boosting and moving the economy further away from Nehruvian bias for heavy industries based Mahalanobis model. However, household sector still contributes handsomely to India’s 30 % savings rate. 30% savings with ICOR of 4.6 (Historically, India’s average ICOR during the three-year period from FY17 to FY19 has averaged 4.23. The highest achieved investment rate in India was 39.6 per cent in FY12.Aug 4, 2019 – Business Standard), gives India a real GDP growth of 6.5% only. Budget assumes 14.5% growth rate. No explanations are offered in the budget for this. Marginal capital-output ratio could have been specified.
# Other risks
Farm protests may adversely affect the agriculture and investment sentiment. Inability to fully control Covid, sluggish recovery in travel and allied services continue to be restricted. A war or war-like situation with China and/or Pakistan and US and Europe GDP contraction can shrink exports.
A small departure from the past is contained in the form of specification of physical targets along with monetary allocation for specific sectors. Though a holistic statement is contained that investment in designated sectors will create more jobs and incomes, the budget fails to specify projected numbers and amounts. Estimating labor coefficient and/or labor-output and capital-output ratios do not require a Nobel Laureate. Such estimates would have made the budget greatly focused.
On the whole, the budget is a skilful exercise of balancing the negatives with positives and hopes and aspirations of the country. We wish good luck and success to the government.
(Shri Prakash is a retired professor of Eminence, BIMTECH (Economics) and Samit Sharma is the founder of IDA Ventures)