Finance Minister Nirmala Sitharaman’s Budget for 2021-22 will rank as the politically boldest budget of the Narendra Modi government since 2014. There are no new populist schemes creating permanent entitlements, despite talks of annual cash transfers under the Pradhan Mantri Kisan Samman Nidhi being raised from the current Rs 6,000 per farm household. Nor are there any cuts or concessions for income tax-payers. This is significant, given the backdrop of the farmers’ protests and significant COVID-19-induced income and job losses in the country’s informal workforce as well as middle classes. That the Budget does not play to the gallery and does not levy any wealth tax or special cess/surcharge for financing the COVID vaccination programme, that the markets feared, is why the BSE Sensex soared 5 per cent on Monday. The Budget, instead, does what the economy requires it to do: It gives a step up in government spending at a time when private consumption and investment are languishing.
More importantly, it is capital spending that is slated to go up by 26 per cent to Rs 5.54 lakh crore over the current fiscal year’s revised estimate of Rs 4.39 lakh crore, which is 6.6 per cent higher than the original provision. That, together with transparent accounting — the entire food and fertiliser subsidy obligation has been taken on the Centre’s balance-sheet, as opposed to the earlier obfuscation through forced off-budget borrowings by the Food Corporation of India and fertiliser firms — makes for a refreshing departure from the beaten path.
What makes the Budget particularly bold are the proposals to increase the FDI limit in the insurance sector from the existing 49 per cent to 74 per cent and targeting of the privatisation of at least two state-owned banks and one general insurance company in 2021-22. This, when the ruling party is already facing a challenge from the opposition to its farm reform laws. Pushing through the required amendments to the existing bank and insurance nationalisation acts may not be difficult in Parliament. But, as with the farm laws, the real test will lie in how the government deals with the strong employee unions in these two sectors. The Budget has pegged disinvestment proceeds from strategic stake sale of PSUs and the initial public offering of LIC at Rs 1.75 lakh crore, which is over and above a programme of monetising assets of the National Highway Authority of India, and other government undertakings such as the dedicated freight corridor assets of the Railways, the oil and gas pipelines of GAIL, IOCL and HPCL.
If all these proposals materialise, it would amount to reforms of the kind that were seen during the time of the first NDA government of Atal Bihari Vajpayee. The Modi government, it seems, has taken a calculated political risk in pushing this economic agenda keeping in view the fact that the next general election is more than three years away. On the other hand, 2021-22 will be a make or break year for the economy. Neither this government nor the country can afford laxity when it comes to reviving the economic growth engine after the marked slowdown since 2018-19 culminated in the first recession in 41 years. The Budget, to that extent, sends out the right message: The government means business.
Among the downsides, the Centre is unlikely to return to the 3 per cent fiscal deficit target in the near future. As the Budget speech noted, the government intends to reach a fiscal deficit level below 4.5 per cent of GDP only by 2025-26, which provides it with the leeway to maintain its spending till the next general elections. Second, the Budget has proposed a new bad bank framework to deal with the problem of non-performing assets. It is not clear how such an entity — whether an asset reconstruction or management company — would operate. How will it be financed? At what price, and when will the bad loans of banks be transferred to it? How will the process be made transparent and shielded from the 3Cs? Third, the government also announced the setting up of a development finance institution to provide long-term financing for infrastructure projects. While, in theory, this makes sense — there are asset-liability mismatch issues when it comes to banks undertaking project financing — the experience with creating such institutions in the recent past, be it IDFC (which eventually became a bank) or IIFCL (India Infrastructure Finance Company Limited), is not very inspiring.
Lastly, while it is good to account fully for food and fertiliser subsidies on the government’s books, how long can their overdue rationalisation wait? The issue prices of subsidised food grains have not been raised for over two decades, and of urea not since April 2010. The Budget has no roadmap on capping the existing minimum support price-based grain procurement — which is, of course, too much to expect in the current circumstances. But this is a reform that cannot be put off indefinitely and it must be hoped that it is still on the government’s radar. The Budget has also continued with the trend of the last few years of raising import duties on items such as mobile phone and auto parts to promote domestic manufacturing. Such proposals dent its reformist intentions.