Union Budget 2021: An unprecedented level of political resolve has been brought behind these reforms. Now, all of these must be taken to their logical conclusion rather than letting them meander
By Atanu Chakraborty, Shravan Shetty
On February 1, Budget 2021 was presented in a backdrop of a once-in-a-lifetime pandemic that had seriously disrupted the economic and social activity. This followed a slowdown in the previous year. The total revenue receipts are expected to be down by 28.8% and government expenditure up 16% compared to budget estimates. The Fiscal deficit will reach an unprecedented level of 9.5% as the economy contracted by 7.7%. This situation called for measures that were out of the ordinary.
The theorists were looking at a counter-cyclical response in terms of higher liquidity in the system. However, this budget, very wisely, has chosen to accelerate the reforms agenda, which has been a critical component of the government’s pandemic response. It has also put a higher focus on capital expenditure away from populist measures like increasing allocation to direct benefit schemes which will help build productive national assets. In addition, it has also kept the tax regime largely stable; a big signal to the investors, as it removes uncertainties.
The announcement has made a very bold move of privatisation of a couple of Banks and an Insurance company. This has been on the agenda for the past two decades. Privatisation would bring more capital and management expertise into these organisations and improve credit flow into the economy. The FDI cap for the Insurance sector has also been raised to 74%. These steps, coupled with efforts to deepen the Bond market, would reduce India’s risk perception. This will bring longer tenure capital and help lower interest rates. A single code for financial markets would make life easier for market participants, reduce volatility and reduce regulatory burden.
Reform announcements in the Energy sector have gone relatively unnoticed. Flexibility to a consumer to choose from a supplier other than the discom is again a bold measure. This has the prospect of effectively separating the distribution infrastructure from the power supply in the economic sense. It should lead to private capital in the power distribution sector. Similarly, the announcement of a comprehensive system operator for gas transmission should facilitate the smooth flow of natural gas across the country. With the development of commodity exchange for gas, one can expect that a functioning and economically viable gas system would be in place for the country. The budget has taken the right step, but energy sector reforms are difficult to implement. It calls for persistence; otherwise, investors may again be disappointed.
The finance minister has increased allocation to capital expenditure by 34.5% to Rs 5.54 lakh crores. Since autonomous organisations, such as NHAI also raise their own finances, total Capex this year is likely to be upwards of Rs. 11 lakh crore. Platform available in the form of National Infrastructure Pipeline (NIP) should help to channelise this resolve.
FM has also laid lots of emphasis on REITS and INVITs. With the removal of TDS on dividends, a viable tax structure is in place for them. Given global uncertainties, it’s unlikely that private investment would flow into greenfield infrastructure projects. Asset monetisation offers an excellent opportunity to access this capital, as cash flows in these projects are relatively stable. With the framework, in place, it should be easy to monetise completed projects. However, one would like to see greater deal flow.
It is worth noting that certain lessons have been learnt from the pandemic. With a clear focus on building the health infrastructure, the budget has earmarked Rs. 2.23 lakh crores for health including Rs. 35,000 crores for COVID vaccination. The Rs. 64,180 crores ‘Atmanirbhar Swasth Bharat Yojana’ and the move to expand the Integrated Health Information Portal to all States and UTs is a right step towards building both a physical and digital Health ecosystem. This will make India better placed to fight any future pandemic while providing affordable universal healthcare.
Steps like increased spending on infrastructure, buying of buses worth Rs 18000 cr for local bodies, setting up of mega Textile park, vehicle scrappage policy and metro projects should perk up the local industry, especially in the sectors such as Steel, cement, engineering etc. A welcome beginning in rental housing should help the accretion of housing stock.
We believe, implementation would be key to achieve what the budget aims to accomplish. Firstly, efficient tax collection and greater buoyancy in taxes would be critical. Disinvestment is the other key area. We feel that it would be essential to balance the budget at the year-end and give life to the companies on the selling block by quickly carrying out sale procedures. Here, minority sale of shares should also be pursued as vigorously as a strategic sale. Thirdly, another critical challenge going forward is to accelerate on the ground, infrastructure development to help convert Capital expenditure to hard assets which can fuel growth and bring in desired benefits. This means an efficient project execution.
This is also the moment to ponder how the baton would be passed to the private sector to drive growth. While the budget has done its part to revive the animal spirits, the efforts undertaken to improve Ease of doing business like the implementation of the single clearance portal should continue. This will help push up private investments, a prerequisite for sustainable growth.
Lastly, experience has shown that the window for reforms is limited. An unprecedented level of political resolve has been brought behind these reforms. Now, all of these must be taken to their logical conclusion rather than letting them meander and then devote reams of paper on missed opportunities.
(Atanu Chakraborty is a Former Economic Affairs Secretary and Shravan Shetty is the Managing Director (Financial Services) at Primus Partners. The views expressed by the authors are their own.)