Organised by Abhyuthana Charitable Foundation Trust on February 13, 2021. Talk delivered by Shri Brajamohan Misra, Ex-Principal Adviser and Chief Economist, Department of Economic and Policy Research, Reserve Bank of India

What is Budget?

This year’s Budget is Special as it has been presented in a background of the economy undergoing contraction during 20-21 due to Covid-19 pandemic. Budget is the Annual Accounting Statement of the Government. It has two components. Revenue Budget which deals with day today receipts like taxes and non-tax revenues and regular expenses on administration including salary, pension, interest payments etc. The gap in Revenue Budget is known as Revenue Deficit. The Capital Budget deals with capital expenditures on buildings, machineries etc. and capital receipts like loans repayment and disinvestment proceeds. The overall gap in the Budget is known as Fiscal Deficit which is met through borrowings and other liabilities. Capital expenditures through asset creation are expected to yield returns unlike the revenue expenditures. It may be mentioned that over the years the Budget has emerged as the major instrument for announcing the major policy decisions of the Government.

Expectations from the Budget 2021-22

The Finance Minister had announced that it will be a “Never Before Budget”. So, there was lot of expectations form the Budget.

Dr. Arvind Pangariya, Ex-Chief Niti Ayog had four recommendations:

Fiscal Expansion

– Recpitalisation of PSU Banks

– Privatisation on a larger scale

– Phase Tariff reduction

Dr. Raghuram Rajan, Ex-Governor of RBI also had four recommendations:

Prioritise Spending

– Boost Infrastructure

– Selling PSUs

– Relief to poorer households and SMEs

On the whole there was overwhelming expectation that the budget should focus on reviving economic growth. In some circles there was expectation that there might be introduction of new tax/cess to take care of low receipts of the Government. The Economic Survey 2020-21 indicated that there is need for maintaining the expansionary stance of the Government for the next 18 to 24 months. The BSE Sensex which had hit a high of 50181 on January 21, 2021 witnessed a sharp declining trend in 5 sessions before the budget shedding 3340 points or 6.7 per cent. Budget nervousness is reportedly the major factor behind the slide, while the other factors are profit boking at higher level, locking up of funds in some large IPOs and withdrawal of foreign inflow.

Major Challenges

The Finance Minister had the following five major challenges while she was presenting the Budget 2021-22 on February 01, 2021.

  1. Getting Domestic Demand Back in Track
  2. Creating Job
  3. Reviving Animal Spirit of the Entrepreneurs
  4. Ending the Credit Drought
  5. Raising Spending without Raising Inflation

The FM Started her Budget Speech stating the Mission of the Budget is to support and facilitate revival of the economy towards sustainable growth. The Vision is AtmaNirbhar Bharat (Self-Reliant India). Then various proposals categorised under six Pillars were announced:

  1. Health and WellBeing
  2. Physical and Financial Capital and Infrastructure
  3. Inclusive Development for Aspirational India
  4. Reinvigorating Human Capital
  5. Innovations and R & D
  6. Minimum Government and Maximum Governance

Fiscal Situation

Thereafter the FM discussed about the Fiscal Situation. Let me start my discussion with analysis of the Fiscal Situation. FM announced that due to the Covid-19 pandemic revenue collection was lower but expenditure was higher for providing relief to vulnerable sections of the society as also ramping up government spending for reviving domestic demand and investment. Fiscal deficit (FD) for 2020-21 revised estimate (RE) was placed at 9.5 per cent of GDP – a historically high figure which crossed the estimates of all the analysts placed in the range of 7 to 8 per cent and much higher than the budget estimate of 3.5 per cent. Let us try to understand this massive rise in the fiscal deficit 2020-21 (RE). Revenue receipts fell short off BE by 23 per cent. While the shortfall was 17.8 per cent for tax revenue, it was much higher at 45.3 per cent for non-tax revenue. For capital receipts (other than borrowings) the major shortfall was in respect of other capital receipts at 84.8 per cent compared to the BE, reflecting low receipts from disinvestment. The revenue expenditure in the RE expanded by 14.5 per cent over the BE while capital expenditure went up by 6.6 per cent. For meeting the gap, the borrowings and other liabilities of the Government went up by 53.6 per cent estimated at Rs. 1848655 crores. This was met through long-term Government borrowings, multilateral borrowings, national small saving funds and short-term borrowings. The decline in GDP in 2020-21 also technically added to the rise in fiscal deficit ratio.  The revenue deficit as a per cent of GDP is estimated at 7.5 per cent for 2020-21 RE up from 2.7 per cent in the BE. For 2021-22 BE the revenue and fiscal deficit are estimated at 5.1 per cent and 6.8 per cent, respectively. The quality of expenditure continues to be poor with revenue deficit accounting for 78.9 per of the fiscal deficit in 2020-21 RE and 75.77 per cent in 2021-22 BE.

According to the Fiscal Responsibility Budgetary Management (FRBM) ACT, the fiscal deficit as a per cent of GDP of 3 per cent was to be reached by 2020-21. Now FRBM ACT will be amended under the clause of exigency due to COVID-19 pandemic. It has been stated in the budget, the fiscal deficit ratio will reach in a phased manner a level of 4.5 per cent by 2024-25. However, no timeframe has been provided for reaching fiscal deficit ratio target of 3.0 per cent.

Major Budget Proposals in 2021-22 BE

  1. Health and Wellbeing

Substantial increase in budget outlay for Health and Wellbeing from Rs. 94,452 crores in 2020-21 BE to Rs. 223,846 crores in 2021-22 BE – an increase of 137 per cent. Rs. 35,000 crores have been provided for Covid-19 vaccine and FM has assured more funds if required. Three important schemes namely PM AtmaNirbhar Swastha Bharat Yojana, Jal Jeevan Mission (Urban) and Urban Swacch Bharat Mission 2 have been announced in the Budget.

  • Physical and Financial Capital for Infrastructure

For building AtmaNirbhar Bharat, Production Linked Incentive (PLI) scheme has been announced with identification of 13 champion manufacturing sector. Budget has provided Rs. 1.97 lakh crores under the scheme over 5 years starting with 2021-22. For infrastructure development the Budget has announced several proposals. The National Infrastructure Pipeline (PIN), which was announced in December 2019, will be expanded to 7400 projects. Three steps have been announced for funding infrastructure. A professionally managed Development Financial Institution will be set up which will act as a provider, enabler and catalyst for infrastructure financing. Rs. 20000 crores have been provided as seed capital and it is expected to have a lending portfolio of Rs. 5 lakh crores within 3 years. A Permanent Body for development of the Bond Market will be set up. The capital outlay for 2021-22 BE is placed at Rs. 5.54 lakh crores, which is higher by 34.5 per cent over 2020-21 BE. A number of proposals have been announced for railways (including Metros), power, ports, shipping, petroleum and natural gas sectors. Particularly, Rs. 305984 crores have been provided over 5 years for viability of the discoms.

  • Banking and Financial Sectors

It has been proposed in the Budget that SEBI ACT, 1992, Depositories Act, 1996, Securities Contract (Regulation) Act, 1956 and Government Securities Act, 2007 will be rationalized into a single Securitas Market Code. Rs. 20000 crores have provided for capitalising the PSBs. Investor Charter to be introduced as a right of all financial investors across all financial products. FDI in Insurance sector to be hiked from 49 per cent to 75 per cent. A new structure to be set up for stressed asset resolution of the banks. Deposit insurance for bank customers will be raised from Rs. 1 lakh to Rs. 5 lakh.

  • Other Important Proposals.

The definition of the small unit has been modified as with a paid up capital not exceeding Rs. 50 lakh to not exceeding Rs. 2 crores. In term of turnover the limit has been raised from not exceeding 2 crores to not exceeding Rs. 20 crores. The disinvestment strategy will be revamped and two PSBs and one public sector insurance company will be privatised. IPO for LIC will be issued during 2021-22. A total amount of Rs. 1.75 lakh have been proposed to be mobilised through disinvestment proceeds. For the start-ups, tax holidays and exemption from capital gains have been extended by one more year to March 31, 2022. In the budget Government raised custom duties for about 1250 items of the 10400 odd items in the custom list for providing a push to AtmaNirbhar Bharat. Besides, there have been other major proposals for agriculture  and other sectors.

Post Budget Reaction and Response

Prime Minister N.D. Modi Budget reflects vision of self-reliance and inclusiveness for every individual class. It reflects India’s growing confidence about its development.

Dr. C. Rangarajan, Chairman, Economic Advisory Council – Budget reflects a reasonably good performance. Lauded the proposals for setting of institutions for long term funding and for providing liquidity to bond market. Questioned the ability to achieve FD/GDP target of 4.5 per cent and indicated a road map for 3 per cent FD/GDP target should be spelt out.

Shri Shaktikanta Das, Governor, RBI – The Union Budget with its thrust on health & wellbeing, infrastructure, innovations among others, should help growth momentum. The projected increase in capital expenditure augurs well for capacity creation thereby improving prospects for growth. There was no observation of fiscal expansion and high fiscal deficit. In its Monetary Policy dated February 05, 2021 commitment has been provided to keep the accommodative stance as long as necessary at least till the next financial year.

Dr. D. Subbarao, Ex-Governor, RBI – In India, because of accumulated debt, interest payments are the single biggest item of government expenditure and eat up more than 40 per cent of total revenues, leaving that much less for spending on growth enhancing sectors like education, health and infrastructure. If today’s debt financed spending does not generate rapid growth the burden of debt repayment will pass on to our children through higher taxes.

Shri N. Chandrasekharan, Chairman, Tata Sons – The budget has provided the kind of policy support necessary for the economy at this moment and also provides a foundation for the country that India will need in the next decade.

Professor N. R. Bhanumurthy, National Institute of Public Finance and Policy – Three things form core of the budget: stability, transparency and realism. Raised the issue of quality of expenditure and possibility of high fiscal deficit leading to inflationary pressure.

Rating Agencies – Rating agencies like S&P, Moody’s and Nomura have welcome the budget indicating the proposals are growth oriented.  However, they have cautioned that Government’ fiscal position is likely to remain a key challenge in the medium term.

The focus of growth over fiscal consolidation, healthcare spending, and steps to further help the start-up eco-system came in praise form the industry leaders across different sectors.

Post Budget Stock Market Reaction and Response

Stock market is known as barometer of the economy and react to the budget instantly. As soon as the FM started delivering the Budget Speech on February 01, 2021 at 11 am, the stock market moved in a rising trend. The BSE Sensex gained about 800 points when the budget speech got over. By the end of the day the Sensex move up by 2300 points (5.00 percent), second highest increase in the Sensex on a budget day. The euphoria in the stock market continued for the next five sessions and the Sensex gained a total of 5045 points or 10.54 per cent in six sessions following the Budget. The market capitalisaton of Indian stock market is estimated at $27 trillion or Rs. 202 lakh crores on February 08, 2021 and as percentage to GDP was placed at 106 per cent.

Why such euphoric movement in the stock market? The reaction of the manufacturing sector in general, the MSME and Start-up segments, the banking, pharma and auto sectors in particular have been positive leading to upward trend in the stock prices of the relative segments. The higher potential growth in these segments will result in higher growth of the economy as a whole. Looking at the future growth prospect, there was massive foreign inflows to the stock market.

Concluding Remarks

The Budget has large many growth inducing proposals. Notwithstanding a decline in the GDP by 7.5 per cent in GDP during 2020-21, the economy is expected to rebound to around 11 per cent in 2021-22 as the budget proposals get fructified. The budget provides a long-term foundation for recovering the economy form the shackles of pandemic and set a road map for future growth. IMF in World Economic Outlook January 2021 Update has stated that India will grow by 6.8 per cent in 2022, the highest growth rate among the developed and emerging markets and developing economies. India has growth potential of 6.5 to 7.5 per cent and the budget may facilitate to reach the potential growth level may be in the medium term.

However, the fiscal consolidation which was tried to be achieved during a long period, has been

given a pause. There is an issue relating to quality of expenditure; with revenue deficit accounting for 75.77 per cent of the fiscal deficit in 2021-22 BE may add to inflationary pressure in the future even though CPI inflation has dropped to a comfortable level 4.06 per cent in January 2021.

RBI @ 90

A decade on from the Global Financial Crisis

by Dasarathi Mishra

In the preface of his bestseller “FREEFALL- America, Free Markets and Sinking of the World Economy” ( 2010), Joseph E Stiglitz, a noted economist and Nobel Laureate succinctly put, “In the Great Recession that began in 2008, millions of people in America and all over the world lost their homes and jobs”.

It is hard to pinpoint when the financial crash of 2007 began in USA. Its roots arguably trace back a good 12 years. It was in 1995 that Bill Clinton’s administration delivered a laudable affordable-housing agenda through amendments to the Community Reinvestment Act.

To fuel its rapid growth it spurned the traditional, hard-grind funding method of gathering deposits, relying instead on fashionable new “securitisation” structures, which wrapped up parcels of mortgages for resale to Wall Street investment banks and, in turn, to investors around the world. The market for mortgage-backed securities (MBS) and even more complex “collateralised debt obligations” (CDOs) boomed.

Before the crisis, in 2005 Jackson Hole Conference Dr Raghuram Rajan, then IMF Chief Economist presented a paper titled “ Has Financial Development Made the World Riskier?”. He pointed out to “Credit Default Swaps” which act as insurance against bond defaults could be immensely painful if default occurs. He questioned an ubiquitous  practice why did financial firms make loans to people who had no income, no jobs and no assets ( NINJA) loans ?

New Century was America’s biggest independent subprime mortgage lender, granting tens of billions of dollars of mortgages a year. To fuel its rapid growth it spurned the traditional, hard-grind funding method of gathering deposits, relying instead on fashionable new “securitisation” structures, which wrapped up parcels of mortgages for resale to Wall Street investment banks and, in turn, to investors around the world. The market for mortgage-backed securities (MBS) and even more complex “collateralised debt obligations” (CDOs) boomed.

So great was investors’ appetite for these high-yielding MBSs and CDOs that mortgage companies lowered their underwriting standards to feed the securitisation sausage machine. Fatally, as loan quality was deteriorating, the Federal Reserve was simultaneously raising interest rates amid concern about consumer inflation. Soon subprime borrowers were defaulting en masse.

If there was one moment when Wall Street knew that a crisis was looming, it was on April 2, 2007, when New Century filed for bankruptcy. Over the months that followed, a wildfire spread around the world. Funds set up to invest in the securitisations — so-called structured investment vehicles, or SIVs had to be bailed out by the banks that had created them.

Market nervousness turned to panic. Banks stopped their usual practice of lending to each other overnight, unsure of who held what on their balance sheets. They found themselves unable to issue new securitisations or even mainstream bonds. And with that, the fate of Northern Rock, which relied for an unprecedented 70 per cent of its funding on these “wholesale markets”, much of it very short-term money, was sealed.

In its  financial stability report, the Bank of England highlighted Brexit, excessive consumer debt and China as risks to beware. Governor Mark Carney sees China, where the total debt-to-GDP ratio has soared above 300 per cent, as a serious danger. “It is the biggest risk to financial stability,” says one expert , pointing out that many of the pre-crisis practices in the west, such as the creation of Sivs to invest in high-risk assets, are commonplace in China today.

The Institute of International Finance said in June that global debt hit a record $217 trillion , up by $70 trillion in a decade, with much of the growth centred on China and other emerging markets. At the same time, investors are seeking “yield” wherever they can find it, pushing up the value of a range of investments. So-called asset bubbles are everywhere as a result.

When the 2007 crisis broke, fingers of blame were pointed in all directions. At subprime mortgage companies for selling loans inappropriately; at  borrowers for taking on too much debt; at investment bankers for creating and marketing irresponsible  products. And at policy makers for presiding over an environment of low interest rates and lax regulation  that allowed a crisis to ferment.


According to Dr YV Reddy, former Governor, Reserve Bank of India “ India has undoubtedly, emerged stronger and more resilient after the crisis.  Perhaps, it is good that the crisis happened before India went irrevocably in the direction of excesses in the financial sector. The macro-balances that were judiciously maintained and pragmatic policies that were adopted, have earned appreciation globally”. ( Page 17 : Global Crisis , Recession and Uneven Recovery”, 2011).

Mr. Dasarathi Mishra is a former Chief General Manager, Reserve Bank of India. He had got extensive exposure to the banking regulations, supervision, international banking, foreign exchange, WTO agreement in financial services, regulation of NBFCs and core central banking functions. He is a founder and Managing Partner of ‘Abhyutthana Financial Learning Centre’ with objective of spreading financial education in schools/colleges.


Financial Inclusion Initiatives in India – RBI’s medium term path

by Dasarathi Mishra

Reserve Bank of India, (RBI) in July 2015, appointed the Committee on Medium-term Path on Financial Inclusion with the primary objective of working out a “medium term (5 years) measurable  action plans”  for financial inclusion.  The Committee was headed by Deepak Mohanty, Executive Director, RBI.

The Committee has made a large number of significant recommendations so that by 2021 over

90 per cent of the hitherto unserved sectors of the population get a better access to financial services and thus would be important stakeholder in the country’s economic progress. It visualizes that with the trinity of Jan Dhan, Aadhaar and Mobile ( JAM)  taking firm hold in our country, there is an opportunity that the three can seamlessly integrate to serve the population and add to  efficiency.

A cross-country study shows that India does not compare favourably in the area of financial inclusion even with other emerging economies. In 2014, over 50 per cent of the Indian adult population held an account in a financial institution, compared to over 70 per cent in various BRICS countries. India’s ATM penetration at 18 ATMs per 1,00,000 adult population is much lower than 65 in South Africa and 180 in Russia. The Committee observed that despite improved financial access, usage remains low as technology has not been optimally leveraged.

Around 60 per cent of the population of India depends on agriculture for living.  The committee is of the view that agricultural credit must go to the actual cultivator class for which land records need to be digitized. States may change their statute so that Credit Eligibility Certificate can be issued to the tenants who till the land facilitating the landless cultivators obtaining bank loans.

Innovations in Government–to-People (G2P) payments could prove to be a game-changer. Mobile banking can be used for G2P payments very efficiently. There is enormous scope to implement direct bank transfers ( DBT)  to a bank  account.

The Committee highlighted  the linkages among financial inclusion, financial literacy and customer protection. The US sub-prime crisis validated that unbridled financial inclusion sans financial education and consumer protection is a folly. In such a milieu, the financial distress created, can disrupt financial stability in a country and can spread globally through trade, investment channels. Therefore,  central banks in the globalized world place lot of premium on financial stability.

Mr. Dasarathi Mishra is a former Chief General Manager, Reserve Bank of India. He had got extensive  exposure to the banking regulations, supervision, international banking, foreign exchange, WTO agreement in financial services, regulation of  NBFCs and core central banking functions. He is a founder and Managing Partner of ‘Abhyutthana Financial Learning Centre’ with objective of spreading financial education in schools/colleges.