The Indian Union Budget presented on February 1, 2021, by the Indian finance minister, Nirmala Sitharaman was unusual in many ways. For one thing, it was much shorter, as many commentators noted, and one of the reasons was that allocations for each Central Government scheme was not spelled out, as on previous occasions. Yet, on closer examination, the number of centrally sponsored schemes number at least 36.
Second, the budget proposals were all pro-market and even recommended privatization of certain public sector financial institutions, which the stock market cheered. Next, FDI limit in the insurance sector which had been discussed for several years and was raised from 26% to 49% in 2016 was further raised to 74% in this budget.
Third, the budget was expansionary and indicated a huge government push to increase capital expenditure, of the order of Rs 5.34 lakh crores in FY22 BE (Budget Estimates) from Rs. 3.59 lakh crores in FY21 RE (Revised Estimates) in order to pump-prime the Indian economy. Almost all of the increase in government capex is targeted at infrastructure growth, including social infrastructure like healthcare.
While some of this is necessary in an economy coming off a pandemic year, will it be adequate to boost consumer demand on which our economy depends, is the question? Not only is the Indian economy private consumption-led, consumption demand has been slowing and weakening for many years even before Covid-19 hit us. The government’s argument seems to be that infrastructure growth will create jobs, which will boost demand and revive the private investment cycle. That seems like a long shot to me, unless we have shovel-ready projects already in the pipeline, which can put hundreds of thousands of people to work immediately, say, in the first quarter itself of FY22.
The chief economic adviser, Krishnamurthy Subramanian, in an article for the Mumbai/Goa print edition of The Economic Times on the day after the budget (a piece that is not to be found in the online edition!) wrote that “an NIPFP (National Institute of Public Finance and Policy, a government think-tank) study shows that the fiscal multiplier from investments in physical infrastructure has been very high for India – 2.5 in the year the investment is made and 4.5 over a few years.” Nobody denies the multiplier effect that infrastructure development can have on the economy, including in creating jobs, but that process takes years. Especially when we know the kind of problems that plague infrastructure projects in India, starting with land acquisition, approvals and clearances, et al. Not to mention the long delays and the huge cost overruns.
Besides, the infrastructure has to be of a type that has a multiplier effect, i.e., in rural and semi-rural areas. Unfortunately, if one looks at the latest unemployment figures from CMIE (as on February 3, 2021) it is at 6.2% for India, with urban unemployment much higher at 8.1% and rural unemployment at 5.4%. And while the finance minister announced certain large infrastructure projects for Assam, West Bengal and Tamil Nadu, for reasons that all these states go to elections this year, none of these states mentioned suffer from the highest levels of unemployment, according to CMIE’s website. What’s more, the impact of infrastructure on job-creation is at best medium-term, as Naina Lal Kidwai mentioned in an NDTV budget panel discussion.
In a pandemic year, where private consumption is estimated to have contracted -9.5% and private investment to have fallen by -14.4%, according to advance GDP estimates from the NSO for FY21, there is no denying that the government has to take the lead in spending, and on infrastructure. While we wait for India’s Q3 GDP figures expected at the end of this month, The Economic Times reports that corporate India has recorded the highest quarterly profits in over two years, in the October-December 2020 period, with revenue growth being flat. CMIE reports similar corporate profits for India’s listed companies, and in fact shows that India Inc recorded a 47.2% growth in net profit in the September 2020 quarter itself, even as revenue fell -6.3% year on year. As expected, this is being attributed to cost cutting measures as well as lower debt and lower taxes for companies. We can see how weak consumption demand is, and we know that it had already been weakening for many years before the pandemic, as I have been writing. Therefore, the government should have considered directly boosting demand as well.
Instead, what I notice is that this government refuses to recognize the demand problem in the Indian economy and has continued to rely on supply-side solutions, which have clearly failed to revive the economy since 2016. And I believe that not all the problems are cyclical, many are structural. Take for example, the agriculture sector which has suddenly become the saviour of the Indian economy during a pandemic year. It was in deep distress, 2016 onwards, not least because of demonetization, and is in serious need of wide-ranging reforms. However, because of the kind of reforms and the way they have been pushed through, we now have a farmers’ agitation on our hands, and one only hopes that the bright spot that agriculture was in 2020, doesn’t get snuffed out in the process.
I notice that in this year’s budget, MNREGA spend has been increased at BE of Rs. 73,000 crores for FY22, from a BE of Rs. 61,500 crores in FY21 which then had to be enhanced by Rs.40,000 crores thanks to the migrant labour crisis. However, the PM KISAN spend which had been increased in last year’s budget has been trimmed this year by Rs. 10,000 crores. The government has decided to step up its water and sanitation investment through its Jal Jeevan Mission with an enhanced spend of Rs.50,000 crores (BE for FY22) as compared to Rs.11,000 crores (RE for FY21). Not only does India need to provide safe drinking water to every household, we need to manage our water resources better. And key to that is raising water tariffs for middle and upper-middle class households in urban areas as well as commercial establishments. Promising free power to farmers too has been a culprit in our mismanagement of water resources.
And while, it is good that healthcare is receiving special attention in this year’s budget, with a Rs. 2.23 lakh crore spend, it is worth noting that even with this, our government spending on healthcare is a paltry 1.8% of GDP. Clearly, more needs to be done in this area. It is also disappointing to see that the National Education Mission spend reduced last year to Rs. 28,244 crores RE when BE was Rs.39,161 crores. This year, the BE amount itself has been reduced to Rs. 34,300 crores. This is perhaps because of Covid-related lockdowns affecting education, but the government intention should surely be directed at reviving it this year, especially when it also claims to be introducing the New Education Policy.
The budget doesn’t provide any relief or stimulus to India’s large MSME sector, which generates the bulk of employment in our country, and which would have suffered the most from Covid lockdowns. The Emergency Credit Guarantee Scheme of Rs. 3 lakh crores for small and medium enterprises had been extended till end of 2021 but as I expected, there would have been few takers for it. Besides, with overall credit growth at merely 6%, there is little chance of private investment reviving. There is a renewed focus on encouraging start-ups with tax holidays extended by another year and exemption from long-term capital gains tax in this budget, but chances of large employment generation here are low.
Most of all, the budget provides no relief or solution to industries most impacted by the Covid-19 pandemic. These are mostly service sector industries such as retail, travel and tourism, dining and hospitality. And services are what contribute the most to the Indian economy at around 55%. In fact, the Union Budget website has a macroeconomic framework document which doesn’t mention the services sector at all, save for the financial sector. The advance estimates show that the services sector will contract at -8.3% within which, customer-facing industries such as trade, hospitality, travel, communication etc. are expected to shrink by as much as -21.4%. On the other hand, this budget merely reiterates PLIs (Production-linked Incentives) of Rs.1.97 lakh crores for the manufacturing industry over the next three years, announced earlier as part of Aatmanirbhar 3.0 Stimulus Package in 2020.
The IMF and the Indian Economic Survey forecast that India’s real GDP will grow by as much as 11%-11.5% in FY22. After a contraction of -7.7% in FY21, this means a growth of only around 4% from pre-pandemic levels, which would leave us at a flat rate of growth, since GDP growth in FY20 itself was only around 4%.
When we look at the fiscal and revenue projections for FY22, the government seems to be expecting a robust growth in tax and non-tax revenues. Much hope is being pinned on the disinvestment of public sector companies, which at Rs 1.75 lakh crores, looks optimistic to me. Disinvestment in India has always been an underperformer, because of the kind of assets they tend to be and the kind of baggage they come with. And even though stock markets are soaring thanks to all the easy money out there, I doubt the target will be met.
On tax revenues, the central government of India is likely to see a contraction of -13.89% in direct taxes in FY21, with corporate taxes accounting for the biggest fall – thanks to corporate tax cuts announced last year – while indirect taxes are expected to grow by 3.6% year-on-year. Hardly surprising, you’d say, with all the increases in import duties and excise duties as well, the latter especially on fuel throughout 2020. It is amazing that for a pandemic year, the government is actually expecting excise revenues to grow by as much as 35.2% (BE of Rs. 267,000 crores vs RE of Rs. 361,000 crores). And that’s not all. Customs revenues in a pandemic year are likely to grow 21.4% (BE of Rs. 112,000 crores vs RE of Rs. 136,000 crores) thanks to all the import duty hikes levied last year to keep out the Chinese and promote domestic production.
Is it any wonder then, that India should be one of the few countries to encounter higher inflation than most peers in a pandemic year, and not all necessarily due to supply shortages? Is it also any wonder that the government is so optimistic regarding its tax and non-tax revenue growth for next year? The prevailing wisdom seems to be that economic growth would rebound so strongly in 2021-22 that tax buoyancy would improve. Direct taxes are expected to grow at 22.67% and indirect taxes at a more modest 11.39%. The reality might be the converse: direct taxes would grow slower and given the government’s penchant for depending on import duty and excise increases, indirect taxes might grow faster. In fact, the finance minister has already indicated several import duty hikes in the budget, aimed at encouraging domestic production. This, when we all know how regressive and inflationary indirect taxes can be.
The government is still going to be left with a considerable revenue and fiscal deficit, which it will have to finance through market borrowings. The fiscal deficit in 20-21 ballooned to 9.5% of GDP, thanks to the pandemic, and is expected to reduce slightly to 6.8% in 2021-22. Gross market borrowings, however, are expected to be almost at the same level of around 12 lakh crores.
The stock markets cheered this year’s budget, rallying for the entire week after the budget and financial sector and infrastructure sector stocks in particular saw the greatest rise. Bond markets reacted with a little trepidation, though, considering how benign they have been over the past few years. Bond yields on the 10-year treasury rose to over 6%.
The more immediate task ahead, of course, is tackling Covid-19 and the vaccination programme, for which the budget sets aside Rs.35,000 crores. I hope the government can expedite some shovel-ready infrastructure projects immediately, which can spur job creation. And that they will fix the financial sector’s woes through the setting up of a bad bank and start the asset reconstruction process.
We need consumption demand to improve, so that private investment revives. Until then, will government spending alone do the trick? We’ll have to wait and see.
The featured image at the start of this post is of high-rise buildings at Powai, Mumbai, by Aniket Bhattacharya on Unsplash