Macroeconomics

Budget 2021-22: A passing grade

  • Blog Post Date 09 February, 2021
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Bhaskar Dutta

University of Warwick

b.dutta@warwick.ac.uk

Assessing the 2021-22 Union Budget, Bhaskar Dutta argues that while there are several positive features, the overall thrust is disappointing because it does not address the needs of the poor. 

Any evaluation of major policy documents such as the Annual Budget of the central government, must keep the context in mind. This is particularly true at this juncture as these have been extraordinary times with the Covid-19 pandemic having battered practically every country’s economy. The Indian economy has suffered more than most others with gross domestic product (GDP) plummeting by 7.7% during the last financial year. What is worse is that it is the bottom third of the population that has suffered the most. So, it was crucial for the Finance Minister and her team to formulate a budget that would enable the economy to stage a quick recovery while ensuring that the overall growth process exhibits a pronounced pro-poor tilt. This was no easy task because the virtual collapse of economic activity during the past year has left government coffers empty, with both tax and non-tax revenues being significantly lower than the budget estimates.

How does the Budget fare in terms of these criteria? I would not give it very much more than a passing grade. While there are several positive features in the Budget, the overall thrust is disappointing because it does not address the needs of the poor.

Overall growth strategy

The Budget does have a clearly articulated growth strategy, with a steep increase in capital expenditure,1 which is meant to act as the principal driver of growth. Overall capital expenditure is budgeted to go up by 34% relative to the to 2020-21 Budget estimates, with infrastructure sectors like roads, highways, textiles, and railways being the favoured destinations. Somewhat blatantly, the poll-bound states of Assam, West Bengal, and Tamil Nadu will be receiving disproportionately large allocations of funds for road construction. 

The overall growth target is 14.4% of growth in nominal GDP during the year. This translates to 11% in real terms, a number that is just below a recent IMF (International Monetary Fund) forecast. At first sight, this sounds quite impressive. Unfortunately, this implies that the economy would grow by only 3.5% over two years or at an annual rate of 1.75%. This blot on the growth performance can only be wiped away if this is just the beginning of a period –lasting several years – of sustained high rates of growth. Possibly the emphasis on the capital sector is at least partly designed to ensure that the returns flow over many years, so as to give a boost to long-term growth objectives.

Job creation?

The government may be hoping that since road construction and other infrastructure projects are relatively labour-intensive, the pattern of new investments will have a significant impact on employment. Perhaps, the government also has faith that the proposed Mega Textiles Parks will contribute to job creation since the textiles industry too is quite labour intensive. However, the Budget does not contain any specific proposals or schemes that are designed to boost employment. There has been some discussion including on Ideas for India - about implementing an urban version of the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA).2 The Budget speech does not mention any such plans. In fact, the budgetary allocation for MNREGA itself is almost 30% lower than the revised estimates3 for 2020-21. Note, however, that there was a steep increase in the allocation to MNREGA during the past financial year in order to provide employment to migrants after they returned from urban areas. 

No explicit pro-poor measures

Clearly, there is absolute faith in the efficacy of the trickle-down process. This is a tall order, given the magnitude of distress suffered in both rural and urban India. Indeed, the absence of any explicit pro-poor or distributional measures is undoubtedly the most glaring omission in the Budget. The allocation for MNREGA could have been kept at a level closer to the revised estimates for 2020-21. Some version of an urban MNREGA could have been started – even if as a ‘pilot’ project. The government could also, at least for a limited period, distribute a larger amount of foodgrains more widely from the overflowing warehouses of the Food Corporation of India (FCI). The buffer stock is so far in excess of any reasonable levels that a sizeable fraction will rot or be eaten by rats. Additionally, direct transfers of small amounts of cash to targetted sections of the population would have been a wonderful step. 

The seeming reluctance to provide large doses of financial stimulus has actually been a pattern observed for over a year now. The government did roll out several packages to mitigate the effects of the pandemic. But, virtually all of them were supply-side measures, with access to cheaper and easier sources of credit being a principal component. Total government expenditure did go up appreciably during the year, rising by over Rs. 4 lakh crores. However, the bulk of this has been not income support or health expenditure. Rather, it has been incurred on food and fertiliser subsidies, and for increase in MNREGA outlays. While these were important sources of support to many, they played no role in increasing demand and stimulating economic recovery. 

Conservative fiscal stance

Despite the modest increase in expenditure, the revised fiscal deficit for 2020-21 is 9.5% of GDP, 6% above the budget estimate. The dramatic decline in GDP meant that the same absolute size of the fiscal deficit was magnified several fold. Another important reason for this steep increase in the fiscal deficit is the sharp decline in disinvestment receipts. Contrary to earlier apprehensions, there was only a small reduction in tax receipts. 

The fiscal deficit estimated for 2021-22 is 6.8%. As a matter of fact, the actual figure 12 months from now may be much worse. The budget has assumed disinvestment receipts to be Rs. 1.75 lakh crore during 2021-22. This is a very ambitious target – both the UPA (United Progressive Alliance) and NDA (National Democratic Alliance) governments have consistently failed to achieve ambitious disinvestment targets in the past and there is no compelling reason to believe that the situation will be very different now. So far, the deficit has been financed by huge increases in market borrowings as well as through dipping into small savings. Debt servicing will become even more difficult in future years. Against this background, perhaps it is not surprising that the Finance Minister has adopted a relatively conservative fiscal stance. 

The good and the bad

There are some positives in the Budget. For instance, there has been a conscious effort to avoid fudging of data – no mean feat in India. The usual practice so far was to hide the size of the food subsidy bill by passing it off as FCI market borrowings. This practice has been shelved and the FCI will have to be funded transparently from now on. The government has also taken another big step forward by clearing off the arrears of the fertiliser industry. 

The Budget speech has also been remarkably brave by announcing plans that go against what is generally considered politically acceptable. The government has said that it will raise the foreign direct investment (FDI) limit in insurance to 74%. It also plans to reduce its holding in the Life Insurance Corporation (LIC) and sell two public sector banks. The Finance Minister even went so far as to use the word “privatisation” in this connection! Of course, we will have to wait and see the degree to which these plans can be successfully implemented. But the intention has been clearly spelt out. 

Not surprisingly, a large sum of Rs 35,000 crores has been allocated to the Covid-19 vaccination drive. Water and sanitation have also been given additional outlays. The Finance Minister has announced a new centrally sponsored initiative to develop capacities of primary, tertiary, and secondary healthcare systems to detect and cure new diseases. However, a regressive step in this Budget is the neglect of the education sector – there has actually been a 6% reduction in the allocation to the Education Ministry. This government has repeatedly emphasised its desire to build a knowledge economy, and to strengthen universities and research institutions to compete with the best in the world. Surely, this is not the right way to achieve these goals. 

Among the more disappointing features of the Budget is the strengthening of protectionist tendencies. The Budget seeks to remove exemptions on a number of items and increase rates on a few others. It is rather ironic that the current government is turning the clock back to bring in policies that were in vogue during the Nehru years. At any rate, the encouragement of domestic industries behind high tariff walls is myopic beyond belief. It does not promote self-reliance, but only high-cost industries that cannot compete in global markets. In some cases, an increase in tariffs on intermediates does not even benefit domestic intermediate producers simply because there are none. This seems to be the case for some components used in the manufacture of mobile phones. 

This is not a good year to be the Finance Minister – there are too many objectives to be satisfied and only a few instruments with which to satisfy them. One has to choose which goals to implement. Unfortunately, the Finance Minister has not chosen wisely. 

Notes:

  1. Revenue expenditure is expenditure for the normal running of government departments and various services, interest charges on debt incurred by government, subsidies and so on. Capital expenditure refers to expenditure that create assets or reduce the liability of the government.
  2. MNREGA guarantees 100 days of wage-employment in a year to a rural household whose adult members are willing to do unskilled manual work at the prescribed minimum wage.
  3. Budget estimates refers to the amount of money allocated in the budget to any ministry or scheme for the coming financial year. Revised estimates are mid-year review of possible expenditure, and need to be authorised for expenditure through parliamentary approval or by re-appropriation order.
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