Uncertain times call for unconventional wisdom. The Union Budget 2021-22 seems to strike the right chord as it strives to fill the huge gap created by the COVID-19 pandemic through focused and innovative approaches. The booster dose will not just speed up the pace of economic recovery but also pave a smooth path for a higher growth trajectory.
The government had been urged to boost demand by diverse sections of policy specialists. The budget lays the roadmap for a construction-based recovery, laying thrust on infrastructure, real estate and other capex activities to generate employment.
The 34.5 per cent increase in budget allocation — Rs 5.54 lakh crore — in capex will help create new jobs and trigger greater consumption and investments. Tax holidays extended to affordable housing projects, together with the extended deduction on loans for affordable housing will give relief to the real estate sector, one of the hardest hit by the pandemic.
Infrastructure activities will get a boost with the widening of financing avenues. The ambitious targets laid down under the National Infrastructure Pipeline necessitate promoting new mechanisms for raising capital. The proposal to set up a Development Finance Institution is a huge positive which will reinvigorate investment. FICCI has been advocating the need for such an institution for a while, and we hope that the government will consider expanding the proposed DFI’s scope to long-gestation projects besides infrastructure. Foreign portfolio investments being allowed in the debt financing of InVITs (infrastructure investment trust) and REITs (real estate investment trusts) will further boost the infrastructure and real estate sectors.
The bold measures announced in the banking and financial sector reflect the government’s commitment towards providing a clear roadmap for reforms. In addition to the DFI, the decision to set up an asset reconstruction company and asset management company to address the stressed assets problem of the banking sector is in alignment with FICCI’s suggestion to create a national asset management company, or a bad bank, for one-time resolution of large non-performing assets. Even the Economic Survey highlights the need for a clean-up of bank balance sheets once the forbearance is discontinued.
The proposed privatisation of two public sector banks and one general insurance company will strengthen the financial sector besides garnering additional revenue for the government. Enhancing the FDI cap in the insurance sector to 74 per cent from 49 per cent and allowing foreign ownership and control with safeguards should help attract greater capital and knowhow in this sector. This is critical to increase insurance penetration, which is abysmally low in our country, and also help augment long-term funds availability for the economy in general. The budget also aims to attract greater financial capital from foreign investors through additional tax incentives at the IFSC (International Financial Services Centre) located in Gujarat International Finance Tech (GIFT) city.
It is noteworthy that agriculture remains a focus area for the government. Allocations for agriculture credit and rural infrastructure have been increased and the corpus of the micro irrigation fund has been doubled. The addition of 22 perishable crops under the “Operation Green Scheme” as well as the proposed increase in the number of mandis under e-NAM is a continuation of the reforms initiated by the government. The reiteration of the government’s commitment on MSP and the detailed statistics highlighting the significant rise in MSP procurement should assuage farmers’ concern in this regard.
The post-COVID world offers India the unique opportunity to become self-reliant and evolve into a global hub for business. With global supply chains undergoing a strategic shift, India must grasp the opportunity with alacrity. The production-linked incentive announced earlier will make Indian manufacturing competitive. The creation of seven mega investment textiles parks over the next three years will make Indian textiles globally competitive and create significant employment opportunities. MSMEs will get a further boost with the correction of the inverted duty structure on several products. The budget also continues the government’s efforts towards enhancing ease of doing business through easier compliances and faceless tax assessment. This is a big relief to taxpayers and, in the long run, will help widen the country’s tax base.
FICCI had recommended the introduction of an incentive framework for states to encourage them to align their policies with national priorities. We are happy to note that the budget has acceded to this suggestion. Besides providing more than Rs 2 lakh crore to states and autonomous bodies for capital expenditure, the government proposes to introduce specific mechanisms to nudge states to spend more of their budget on creation of infrastructure. The government also plans to incentivise states to undertake disinvestment in public sector companies under their remit through an incentive package.
Under the current circumstances, the government’s fiscal management is in the right direction. The focus on garnering more non-tax revenues through strategic disinvestment, privatisation and monetisation of non-core assets will help the government raise adequate resources to fund development expenditure.
By prioritising growth over fiscal considerations, the budget has laid the foundation for resilient economic recovery. It also underlines the government’s commitment towards structural reforms, which can truly lay the foundations for “Atmanirbhar Bharat”.
This article first appeared in the print edition on February 3, 2021 under the title ‘Way to grow and reform’. The writer is president, FICCI