WEBINAR ON “UNION BUDGET 2021-22: ASSESSMENT AND PROSPECTS FOR INDIAN ECONOMY”

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