By Rajnish Gupta
Indian Union Budget 2021: 2021 budget would be presented with unprecedented economic challenges. The economy recovery has been uneven. Sectors like Agriculture, manufacturing and exports have largely recovered. Others like hospitality, travel, CV production, education, etc continue to be challenged. Public finances are stressed. Tax collections during the period April to November 2020 are lower by 16% vis-à-vis previous year. The credit growth is stalled and the banking sector NPAs are expected to increase.
Government has undertaken significant economic reforms, perhaps most serious since 1991, impacting multiple sectors i.e., agriculture, manufacturing, mining, infrastructure, energy, etc. Reforms have focussed on addressing supply side issues. Demand has not picked up adequately. Government may have to step in the as the spender of last resort. Theoretically, Governments’ have multiple options while providing stimulus i.e., direct money transfer, tax cuts and spending on public goods and services. Of these, it is likely that the Government will focus on spending on infrastructure. This will provide the biggest return for the buck. This spending would not only create assets with long term benefits and returns, but also drive employment and ensure that the stimulus is spent and not parked in banks. National infrastructure pipeline provides a list of spending priorities. Government could prioritise those areas that can make manufacturing competitive such as setting up of special economic zones, investments related to freight transportation and logistics, etc.
While funding increased expenditure on the short run, the Government finances need to be on a sustainable path. Increase in GST revenues of Rs 1.15 lakh Crores in December 2020 suggests better tax compliance. One area of increasing revenues to meet short term expenditure requirement is an active divestment programme. In 2019-20, the actual receipts were Rs 50,000 Crores against a target of Rs 90,000 Crores. The target in the current year is Rs 210,000 Crores and with actual divestments of less than Rs 12,000 Crores till date. Government needs to think more deeply about the type of assets to divest including the conditions for divestment. Otherwise there is a risk of missing targets. In May 2015, Government that it would identify strategic sectors that need a PSE and number of PSEs in that sector would be rationalised. Maybe it is time to look at the financial service sector, especially PSU banks.
The Government has signalled its desire to increase the role of private sector in banking, including through issuance of new licences. NPAs are an issue and as the RBI said, “The data on gross non-performing assets (GNPA) of banks are yet to reflect the stress, obscured under the asset quality standstill with attendant financial stability implications.” All large banks (private or public) have been supported by the Government in times of stress. Private sector banks have been supported by liquidity support and facilitating equity infusion by other banks e.g. Yes Bank. In contrast public sector banks have been supported by the exchequer. Over a period of 12 years (till 2019-20), the Government has infused equity of Rs 385,000 Crores in public sector banks. Besides NPAs, banks require capital to grow. HDFC Bank’s stockholder equity has increased from Rs 25,000 Crores in 2010-11 to Rs 170,000 Crores in 2019-20 funded through a mix of internal accrual equity infusion. Early estimates suggest that Rs 100,000 Crores further equity infusion may be required. It is time for Government to consider divesting its stake in public sector banks. A more competitive banking sector could also result in lower spreads for banks in India and benefits of rate cuts passing on to Indian businesses and consumers.
One of the learnings of COVID is the importance of speedy decision making in uncertainty. Role of Governments in managing economies has never been more important. The 2021 Budget will be watched like never before.
(The author is with Tax and Economy Policy Group, EY India. The views expressed are personal.)