For the first time since the Narendra Modi-led National Democratic Alliance (NDA) came to power in 2014, the government has presented a budget that has drawn praise from all sections of stakeholders across India’s diverse political economy, barring opposition parties. However, there are doubts about how much the budget will achieve.
The primary objective of the budget is economic growth, which the budget seeks to achieve through spending. In a pandemic-hit economy, increased allocation towards public health is hardly surprising. But the government has taken a gamble by focusing on infrastructure, especially in the five states where elections are to be held in April-May, with funding to come via asset monetization and the creation of a new development financial institution. The government has also pledged to set up an asset management company to take over stressed debt from banks’ balance sheets, thought to be one of the biggest challenges to the economy once the moratorium on debts ends in a few months, and to finance part of the federal expenditure. Finally, it has also proposed a cess to fund agriculture infrastructure, and a higher customs duty that ranges from 1.5% to as high as 100% (for imported alcoholic beverages) to protect domestic firms as part of the self-reliant India strategy. The federal government is allowed to collect all the funds from a cess and add it to its own kitty without having to share it with the states, provoking state governments, especially those ruled by opposition parties, to cry foul.
The fine print
Health: A federal scheme of INR 642bn (USD 8.76 bn or 0.3% of GDP) for six years to develop healthcare infrastructure; INR 350bn (USD 4.79bn or 0.16% of GDP) for vaccine rollout; schemes for universal water supply of INR 2.9tn (USD 39.7 bn or 1.3% of GDP) and sanitation of INR 1.4tn (USD 19.1bn or 0.6% of GDP) over five years.
Infrastructure: Expansion of the ‘National Infrastructure Pipeline’ to cover more projects: a new development finance institution with a capital base of INR 200bn (USD 2.7bn or 0.09% of GDP) for long-term debt financing. Monetizing brownfield projects, new investment trusts to attract global funds, and enhanced funding to states and autonomous bodies. A rescue scheme for power distribution companies that are almost universally making losses, amounting to INR 3tn (USD 41bn or around 1.3% of GDP) for five years.
Financial sector: Increase in FDI limit in insurance from 49% to 74%. An asset reconstruction company and asset management company to take over stressed debt from banks’ balance sheets. A bank recapitalization commitment of INR 200bn (USD 2.7bn).
Who will pay
The budget concedes that all this spending will lead to a fiscal deficit, setting a significantly higher fiscal deficit target of 9.5% of GDP in FY21 and 6.8% in FY22. Several procedural changes in the way taxes, especially income tax, are collected have been added to the mix to prevent harassment of both investors and citizens. That no fresh taxes have been imposed, as was widely feared, has added to the sense of overall relief.
The government has said it will fund these expenditures through higher and more aggressive divestment of state-owned entities. Significantly, not only are loss-making enterprises being sold but also profit-making ones. Assets will be sold to both strategic investors and via the markets, leveraging the bull run of the recent months in the Indian stock market as there are few profitable avenues of investment left for retail investors after interest on government securities has declined steadily over the years. The government will also borrow.
Most opposition parties including the Congress argue that 2021-22 was not a year to present a growth-oriented budget. What the economy, especially small business, needed was cash via direct transfers, especially to low income groups who had lost both income and employment. However, the government says support was given when the pandemic and lockdowns were at their peak. Now that economic activity has resumed, policy opportunities need to be created so that people can put their business back together again.
The opposition has charged that with hundreds of thousands of farmers protesting the government on farm laws, the budget does not go far enough to address the myriad problems afflicting Indian agriculture. But the government is firm that the central issue farmers are protesting for – repeal of the laws – will not happen. A police crackdown on the farmers cannot be ruled out.
The success of the central premise of the budget – that government spending and privatization will mitigate the economic effect of the pandemic – will be tested in the months to come. The administration is just hoping its gamble will pay off.