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Explained: How Budget maps spending route out of pandemic

Budget 2021: There are two ways in which the government can boost growth. One is to cut taxes — for the common man and/or for companies. The second is for the government to spend more. Starting next year, the government wants to increase its capital expenditure relative to revenue expenditure.

Written by Udit Misra , Nushaiba Iqbal | New Delhi |
Updated: February 3, 2021 10:19:29 am
budget 2021, budget, budget 2021 highlights, budget highlights, budget 2021 india, budget 2021 important points, budget 2021 highlights, budget 2021-22, budget 2021 key highlights, budget 2021 highlights, india union budget 2021 announcements, budget 2021 income tax, income tax announcements, budget 2021 direct tax, budget 2021 explainedBudget 2021 was presented in the Parliament on Monday. (Illustration: Mithun Chakraborty)

What is the state of the economy according to the 2021-22 Budget announced by Finance Minister Nirmala Sitharaman?

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It is well known that the Covid-19 pandemic resulted in the Indian economy contracting by over 7% in the current financial year. Contrast this to the fact that the average annual rate of growth since the start of economic reforms in the early 1990s was around 7%.

A sharp contraction of the economy, which came after three successive years of deceleration in GDP growth, dealt a heavy blow to the government’s finances. In the current financial year, the fiscal deficit, which is a measure of how much the government has to borrow in order to plug the gap between its revenues and expenses, jumped from a budgeted 3.5% (of the GDP) to 9.5%.

The Fiscal Responsibility and Budget Management (FRBM) Act requires India to reduce the fiscal deficit to just 3%. The Union government will not only fail to achieve this goal this year or the next (when it would be 6.8%), but will not meet it until 2025-26 — one year past the term of the current government.

In other words, government finances have been bent out of shape not just for this year but for the coming five years, thanks to the disruption caused by Covid-19.

And this matters because, at the start of 2020, when all other engines that drive domestic economic growth — private consumption, business investments, and exports — were faltering, it was expected that government spending would kick-start the Indian economy. But because of the pandemic, the government’s ability to spend has been severely affected. That’s because in the current financial year, as economic activity evaporated, its revenues collapsed, while the need to provide free food and other subsidies sky-rocketed.

Budget 2021 was presented in the Parliament on Monday. (Express Photo by Partha Paul)

So, what has the government done in the Budget for next year?

There are two broad ways in which the government can boost growth. One is to cut taxes — for the common man and/or for companies. A tax cut leaves individuals with more money to spend and boost economic activity. A tax cut for companies leaves them with more profits that they may think of re-investing in the economy, and thus boost economic activity (read GDP).

But in the past couple of years, the government has already provided a historic cut in corporate tax rate — making it one of the lowest in the world. For individuals, too, there have been several relief measures. Moreover, as the two-and-a-half-times increase in borrowings shows, the government simply cannot cut taxes of any kind anymore.

The second way to boost growth is for the government to spend more. Doing so means the government leaves people and companies with more money, and that in turn boosts economic activity. But the resource crunch also meant there was very little room for the government spend its way to a recovery.

Sitharaman and Anurag Thakur addressing the press after the Budget presentation

At first glance, the key strategy employed by the government seems to be to switch the nature of its expenditure. In other words, starting next year, it wants to switch towards increasing capital expenditure relative to its revenue expenditure. Capital expenditure essentially implies spending on creating productive assets such as roads, while revenue expenditure refers to the government’s day- to-day spending, such as salaries.

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As such, while the total expenditure in 2021-22 is pegged at Rs 34,83,236 crore against Rs 34,50,305 in 2020-21, revenue expenditure in 2021-22 is budgeted at Rs 29,92,000 crore, which is almost 3% less than the current year. On the other hand, capital expenditure in the next year is budgeted to be Rs 5,54,236 crore — 26% more than this year. This is the most significant takeaway from this year’s Budget because more often than not, governments — even this one in the past — tend to sacrifice capital expenditure in favour of revenue expenditure.

Choosing capital expenditure might appear like a unsympathetic choice — because it does not involve money to be handed over directly to the needy (and there are a lot of genuinely needy people in the wake of the Covid-19 disruption). Instead, it is investment into raising the productive capacity in the economy, which is the best chance India has to return to a path of sustainable economic growth.

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But what about the sectors most impacted by Covid-19?

There were two sectors of the economy that were perhaps most grievously hurt due to the Covid-19 disruption.

The first was healthcare as it became clear that there is no alternative to having a robust public provisioning and that the existing Budget expenditure on this is woefully inadequate.

The second was education, as lockdowns and the shift to online education brought out the deep digital divide in the country. Most Indian students did not have access to the Internet and/or a computer and suffered as a result.

In her Budget speech, Finance Minister Nirmala Sitharaman asserted that health, education, and inclusive development were central to her expenditure agenda. However, on all three counts, the actual outgo falls short.

For instance, the Finance Minister said the health allocation for 2021-22 has gone up by 137%. But some experts see this figure differently. Professor Dipa Sinha of Ambedkar University argued that the Finance Minister has included the one-time expenditure for Covid-19 vaccination of Rs 35,000 crore, as well as Finance Commission grants for water and sanitation (which effectively go to the state governments) in the health allocation.

On education, the Finance Minister announced plans for improving the existing schools under the New Education Policy as well as beefing up the facilities for tribal students in the Eklavya model residential schools. But in terms of allocation, the ‘Budget at a Glance’ document showed that education will receive only 9.5% more in the coming year.

What about the Atmanirbhar Bharat Abhiyan? How has it influenced the Budget?

The sum and substance of the Atmanirbhar Abhiyan is to promote domestic industry by either preventing imported goods (by raising import duties) from undermining domestic producers or helping domestic companies to source cheap imports (by reducing import duties). For instance, the Finance Minister said: “MSMEs (micro, small and medium enterprises) and other user industries have been severely hit by a recent sharp rise in iron and steel prices. Therefore, we are reducing Customs duty uniformly to 7.5% on semis, flat, and long products of non-alloy, alloy, and stainless steels. To provide relief to metal re-cyclers, mostly MSMEs, I am exempting duty on steel scrap for a period up to 31st March, 2022. Further, I am also revoking ADD and CVD on certain steel products. Also, to provide relief to copper recyclers, I am reducing duty on copper scrap from 5% to 2.5%.”

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Similarly, to help MSMEs in the domestic textile industry, the Finance Minister reduced the basic customs duty on goods like nylon chips, nylon fiber & yarn etc.

For MSMEs in the leather industry, she withdrew the exemption on imports — in other words, make imports difficult — of certain kind of leathers as they are domestically produced in good quantity and quality, mostly by MSMEs. Similarly, she raised customs duty on finished synthetic gem stones to encourage their domestic processing.

“To benefit farmers, we are raising customs duty on cotton from nil to 10% and on raw silk and silk yarn from 10% to 15%,” Sitharaman said.

Overall, with these steps the government hopes that the beleaguered MSMEs and the related informal workforce will receive a boost.

What about medium- and long-term reforms?

Given that government finances limit the ability of the government to boost growth in a direct manner, the Finance Minister used this Budget to signal significant structural reforms.

There are three key developments that are worth noting in this Budget:

* The FM has used the Covid-19 disruption and the consequent fiscal slippage to come clean on the true extent of India’s fiscal deficit. That is why instead of the expected 7-7.5%, the actual fiscal deficit for the current year was reported to be 9.5%. This allows observers to assess the Indian government’s finances transparently and thus raises the credibility of Budget numbers.

* “… We propose to take up the privatisation of two Public Sector Banks and one General Insurance company in the year 2021-22. This would require legislative amendments and I propose to introduce the amendments in this Session itself,” the Finance Minister said. Openly announcing the privatisation of public sector banks and a public sector insurance company suggests at least two things. One, it shows that the rising pile of non-performing assets (NPAs) over the past decade made it difficult for the government to repeatedly recapitalise government-owned banks, especially when its overall finances are facing the most severe crunch. Two, the government acknowledges that it has a limited role in India’s banking system. The latter point holds true for the insurance sector too.

* Thirdly, in a move related to public sector bank privatisation, the government decided that it will create a new Development Finance Institution (DFI). A DFI is supposed to fund infrastructure projects. The trouble in financing infrastructure in the recent past has been that such projects typically require long-term financing. Using public sector banks to finance such projects, as India did, led to the banks being straddled with huge NPAs. For one, such banks did not have the expertise to assess risk accurately. Moreover, regular banks faced an asset-liability mismatch — in other words, they accepted deposits (their liabilities) for a short term but extended loans (their assets) over a much longer term. This is not the first time that India would have a DFI and, as such, it is important that the mistakes of the past are not repeated.

budget 2021, budget, budget 2021 highlights, budget highlights, budget 2021 india, budget 2021 important points, budget 2021 highlights pdf, budget 2021-22, budget 2021 key highlights, budget 2021 announcement, budget 2021 announcements, union budget 2021 announcement, budget 2021 highlights pdf Finance Minister Nirmala Sitharaman with MoS for Finance Anurag Thakur leaves the Finance Ministry for the Parliament to announce the 2021-22 Union Budget in New Delhi

Will the Budget help in creating more employment?

The upshot of the emerging Budget strategy is that the government would rather like to spend on building capital resources and in doing so “crowd in” private investments, which, in turn, will be the source of new jobs.

But that is the logic on paper. In the real world, job creation will take time. For those who lost their jobs during the pandemic or those who could not get their first one, the outlook is still grainy.

That’s because economic recovery — especially of the order which creates lots of jobs and quickly — still eludes India.

In 2021-22, India will register fast economic growth but the fact is this will only make up for the output lost in 2020-21.

It is significant that India was growing by just about 4% (in 2019-20) going into the Covid crisis. Growing at 7% or 8% coming out of it (that is 2022-23 onwards) is not a foregone conclusion.

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