Union Budget 2021: Covid response lessons from the world

December 29, 2020 2:17 PM

Union Budget 2021 India: India’s Union Budget 2021 might be one of the most difficult budgets in recent times as it is expected not only to move India on a path of V shaped recovery but also meet aspirations of more than a billion people, to expand India’s role in the world.

Budget 2021-22, Union Budget 2021Economics has many different schools of thought and each of them may have different solutions to the ongoing COVID-19 crisis in as much as they can be contained in a budget document.

By Rajesh Mehta & Badri Narayanan Gopalakrishnan

Indian Union Budget 2021-22: India’s Union Budget 2021 might be one of the most difficult budgets in recent times as it is expected not only to move India on a path of V shaped recovery but also meet aspirations of more than a billion people, to expand India’s role in the world. Several questions exist in the minds of people and experts. Does the government want to spend more on defence or on education and health? Does it look for short term solutions or work on long term priorities? Does it want to be more open and competitive globally or does it just want to boost domestic industry?

Economics has many different schools of thought and each of them may have different solutions to the ongoing COVID-19 crisis in as much as they can be contained in a budget document. Keynesians would vouch for increased stimulus packages possibly raising taxes to fund them, while neoclassical economists would suggest more tax cuts and market reforms to help push the industry to bounce back on its own. There are visible tradeoffs in all these ideas. Keynesian solution requires higher taxes to fund the stimulus, risking a demand reduction further due to higher prices resulting from these taxes. Tax cuts may put the government income into further stress and reforms that really matter are not easy to implement in a short time.

If the Modern Monetary Theorists (MMT) have their way, the current crisis is easy to solve because they propound this idea – the country budget is not comparable to household budget in the modern economy with no gold standard; in other words, the RBI can print as many Rupee notes as needed to fund the recovery budget without raising taxes. As romantic as this may sound, this is not widely accepted by most economists in the mainstream. Even if it is possible, it is only even imaginable in the context of a strong currency like USD, which has helped the Fed to keep interests low for a long time and injecting as much money as needed, without facing much heat from inflation. The signing by President Trump into law, of a $600 Covid relief package to Americans, was followed by another $2000 stimulus for each American adult and $600 for each child, which has been already approved by the House of representatives and may have been passed by the Senate by the time this article is being read. All these are in addition to a multi-trillion package announced in the past few months in terms of unemployment benefits, consumption subsidies, tax rebates, etc.

Given this situation, wherein traditional methods or schools of thought may not directly help, countries are coming up with innovative ideas to tackle the Covid-19 crisis. Ideas from different schools of thought are mixed and matched and yes, there is some sight of success in some of these economies.

Let us look at Germany for example. They expect to borrow over $110 billion, which is ten times the usual deficit. More than half of it is in labor subsidy to finance labor subsidies, reducing health insurance contributions and also to fund healthcare system enhancements like intensive care unit ventilator capacity increases. Within a few months, Germany moved from the austere spender with a ‘black zero’ implying no borrowing by the federal government since 2014, to the largest spender in the EU. The 2021 German budget allocates $482.3 billion, implying the second largest deficit since World War II. If anyone wonders when was the largest deficit, it is for 2020 budget (about $798 billion) for Covid recovery, through an unprecedented increase in supplementary budget! Over a third of this is direct fiscal impulse, and the rest is tax deferrals. This number does not even include the liquidity and guarantee measures that amount to another $1.4 trillion, about twice this amount. Reduction in Value Added Taxes (VAT), paying each household €300 per child and extending short-term work contracts are some features that help reduce the stress on people at large and boost their spending.

South Korea had similar developments, with over $29 billion supplementary budget in 2020, to combat its worse economic crisis since the 1998 Asian Financial Crisis. This plan allocates more spending to reduce job losses by protecting them, developing Covid-19 vaccine and to boost consumption via subsidies. South Korea flattened the curve with much stricter implementation of measures without closing businesses, than many other countries, in detection, containment and treatment phases. They have both past experience and track record from MERS, and institutional settings and fund allocations to help this happen. As part of these recovery phases, they also promoted development of capacities to manufacture things like PPE. A strong recovery is in sight there both due to these policy and global demand resurgence that is helping exports.

Japan is another example – they spent more than a quarter of their GDP in a multitude of measures. They include promotion of consumption by offering steep discounts to hotels and restaurants for example, not closing down businesses, loan support for SMEs and even larger enterprises, employment support measures, healthcare improvements, public investment, special support to affected sectors, regional economic promotion of sectors like agriculture, forest and fisheries, resilience of supply chain by attracting investments and enhancing production capacities, digital technologies, etc. New Zealand also has had several positive measures that have been effective. Wage subsidies, cashflows support for small businesses, leave support, provision of PPEs, ventilators, etc., had assured of income protection and containment of Covid-19 simultaneously.

When it comes to developing countries, there are good examples to emulate as well. Vietnam has spent substantial budget on delayed tax payments, land lease fees, debt restrictions, social insurance, promotion of production of masks and PPEs, reduced customs on Covid supplies, etc. Brunei has taken advantage of its low population to pursue strict surveillance and public communication, to completely insulate it from the propagation of Covid-19.

India has different challenges domestically, yet we can learn from these experiences. Broadly speaking, we have not done poorly in terms of food support for the entire population, credit guarantees for SMEs and several other types of loans for businesses, as well as some pathbreaking reforms in many sectors. We might want to fund infrastructure projects and promote private investments as well, since interest rates are at all-time low. We should increase our spending on health and education if we want to take benefit of demographic dividend. We might want to make Atmanirbhar program a success by making India a manufacturing hub. This would only happen if we are competitive, economy is open and reforms are continued with vigour.

The startups & MSME’s need to be given tax holidays so that they can survive the unfavorable market environment. There needs to be cash transfers to poor people in urban cities who do not have anything like MNREGA. Leading economists like Raghuram Rajan, Amartya Sen and Abjijit Banerjee have stressed a lot on the need to provide stimulus packages to the people at large, particularly the poorer ones, so that they get relief from their job losses and income reductions. There needs to be a better coordination between the Centre & States. Now, based on the learnings from other countries and domestic context, we may have to come up with aggressive measures to boost income and consumption of the large part of the population. Tax cuts and credits may be one way to go, and definitely the FRBM needs to be relaxed this year, with an unavoidably higher budget deficit.

(Rajesh Mehta is a Leading International Consultant & Columnist working on Market Entry, Innovation & Public Policy. Dr. Badri Narayanan Gopalakrishnan is the Founder Director, Infinite Sum Modelling, and affiliate faculty member at University of Washington Seattle, Senior Fellow with ECIPE Brussels and CSEP (formerly Brookings India) New Delhi. Views are personal.)

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