With the economy battered by Covid-19 that has taken 1.5 lakh lives and pushed India into a recession, Union Finance Minister Nirmala Sitharaman Monday liberated herself from fiscal restraints to budget for a massive expenditure push to bolster the economy’s nascent recovery.
What makes Budget 2021-22 probably the boldest in the last six years is her intent to privatise PSU banks and state insurers — a taboo for all governments — especially at a time when reformist farm laws, facing a backlash, have been put on effective hold.
The political leadership’s call to ignore fiscal hawks and present a reform-led growth Budget buoyed market sentiments with the BSE Sensex posting a gain of 5 per cent — the sharpest surge on a Budget day since 1997. The Sensex jumped 2,315 points to close at 48,600.61 while the Nifty gained 4.74 per cent to close at 14,281.20 points.
Underpinning the growth strategy — the Budget estimates the GDP to grow 14.4 per cent in 2021-22 – is the the government’s stance not to extend any income tax or other sops in a year when demand collapsed, forcing many out of jobs, and still others suffering salary cuts. Instead, Sitharaman relied on boosting capital expenditure, a 34.46 per cent hike over 2020-21 budget estimates, which in itself is expected to trigger a growth cycle, in turn generating employment and boosting incomes.
Sitharaman has also brushed aside worries of high fiscal deficit and unkind cuts by sovereign rating agencies, providing a glide path to pare fiscal deficit to 4.5 per cent of GDP by 2025-26. This essentially means spending will remain at elevated levels over at least the next couple of years before growth converges to pre-Covid-19 levels, and then stays at India’s trend growth rates of 6.5 per cent to 7.5 per cent.
The fiscal deficit – estimated at 6.8 per cent of GDP in 2021-22 – would be funded through market borrowings of Rs 12.05 lakh crore. Given the pandemic, the fiscal deficit in the current financial year has shot up to 9.5 per cent of the GDP against the Budget Estimate of 3.5 per cent of GDP. While there are concerns higher spending may stoke inflation, the Budget gameplan is clearly leaning more towards growth.
Along with the aggressive spending plan, Sitharaman also put in place an institutional structure – a bad bank and a developmental financial institution (DFI) – that will enable low cost funds for infrastructure investments. The DFI will get statutory backing, Rs 20,000 crore towards capital, and will be able to generate Rs 5 lakh crore lendable resources over the next three years. Along with this, Rs 20,000 crore has been set aside for recapitalisation of banks.
Sitharaman’s Budget follows a series of measures as part of the AtmaNirbhar Bharat packages over the last 10 months, which she said, added up to Rs 27.1 lakh crore or 13 per cent of GDP. After the Budget, Prime Minister Narendra Modi said, “It carries the vision of Atmanirbharta…The government gave proper attention towards fiscal sustainability while increasing the size of the Budget.”
The massive fiscal expansion has been timed with an uptick in economic recovery; unlockdown process that is practically over; daily Covid-19 cases of under 15,000, and the commencement of an all-India vaccination programme for which Sitharaman has budgeted Rs 35,000 crore next year. She has also proposed to provide Rs 2 lakh crore to states and autonomous bodies besides working out specific mechanisms to nudge them to spend on infrastructure creation.
With the Covid-19 shadow looming large over the economy, Sitharaman hiked the allocation for health and wellbeing by 137 per cent to Rs 2,23,846 crore in 2021-22.
Sitharaman also said the government has accepted the recommendations of the Fifteenth Finance Commission that 41 per cent of net Union tax proceeds be shared with states, and 1 per cent for the Union Territories of Jammu and Kashmir, and Ladakh. To address the mismatch in expenditure cycles, the FFC’s proposal to create a non-lapsable fund for defence has also been accepted.
The spending push is directed towards infrastructure sectors including roads and highways, railways, textiles, metro trains, health and water supply. Sitharaman announced a scheme for the textiles sector, under which seven parks will be set up over three years. She announced new highway projects that include poll-bound states: Tamil Nadu (3,500 km – Rs 1.03 lakh crore), Kerala (1,100 km – Rs 65,000 crore), West Bengal (675 km – Rs 25,000 crore) and Assam (1,300 km – Rs 34,000 crore).
A much-awaited scrapping policy for personal and commercial vehicles is also expected to boost demand for automobiles. Personal vehicles over 20 years and commercial vehicles over 15 years will have to take fitness tests.
What really caught the attention of FIIs tracking the Indian economy, was the decision to hike foreign direct investment (FDI) limit in the insurance sector to 74 per cent from 49 per cent now, and privatise two public sector banks and one state-owned general insurance company next year. Laws would be amended for these and to facilitate an IPO for LIC.
Sitharaman said the government has approved a policy of strategic disinvestment of PSUs. The policy states that all PSUs will be privatised barring a bare minimum in four key strategic sectors: from transport and telecom, to defence, atomic energy, power, coal, banking and insurance. Along with this, she put in place a monetisation plan for assets of NHAI, PowerGrid, Railways, airports, warehouses and sports stadiums.
As part of the AtmaNirbhar Bharat policy, the Finance Minister provided Rs 1.97 lakh crore over the next five years under the Productivity-Linked Incentive scheme covering 13 sectors. She also continued with protective measures for the domestic industry by levying customs duty on a range of products including electronic items, compressors for refrigerators and ACs, automobile parts such as electric motors and relays, etc.
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