Union Budget 2021 India: Stars, it appears, have started to align as far as the Indian economy is concerned. The only negative of the Budget is the huge fiscal deficit and this can potentially hurt inflation and interest rates
This addressed the worst fears of the market and should help spur the demand side of the economy.
By KVS Manian
Indian Union Budget 2021-22: The Union Budget and the Reserve Bank of India’s monetary policy were much awaited in post-Covid-19 times and most people believe that stars are aligning as far as the Indian economy is concerned.
The finance minister, to begin with, has taken a bold stance of deviating from the fiscal path by letting the fiscal deficit go up to 6.8% to provide adequate fiscal support to the economy. The positive part of this is also that focus on capital expenditure is high. Investment in infrastructure, including in key sectors such as housing, roads and railways, should provide a fillip to growth. It shows the resolve of the government to put growth as the key priority for the economy. The bold stance on the deficit allowed the finance minister to avoid any disappointment to the market, industry and individuals on taxes.
This addressed the worst fears of the market and should help spur the demand side of the economy. If at all, some of the revenue estimates are conservative. It is also hoped, given this scenario of a need to support economic growth playing out in many countries including the developed ones, global rating agencies will take a more pragmatic approach and provide some leeway to the government by adopting a wait-and-watch policy for some time instead of adopting a knee-jerk reaction of a downgrade in light of the higher fiscal deficit. The Budget is betting that we are about to kick-off a multi-year growth trajectory that will help keep the equity markets upbeat and aid a sustainable inflow of FPI and FDI capital over the next few years.
The Budget has focused on incentivising localisation, monetising government assets, creating better social infrastructure and improving the health of the financial sector. These require significant execution focus in the coming year, but if the government can keep focus and execute well on these, the long-term impact will be substantial. The proposed size of disinvestment and the plans are also finally walking the ‘minimum government, maximum governance’ talk.
Years of anaemic growth, poor risk management at banks and a sputtering legal system that makes speedy recoveries difficult have led to significant build-up of non-performing assets (NPA) in banks. Creation of a ‘bad bank’ will help banks finally shed this baggage, improve their balance sheet and make incremental lending easier. But that is still a one-time clean-up act, so more important is the need to arrest future reversion to these problems by inculcating best practices and enhancing risk management and governance in general in the sector.
In that context, the announcement to privatise a couple of state-owned banks is noteworthy. Merger of state-owned banks ensures that the country has large public sector banks that are well-distributed geographically, and as such there is no longer a need for so many of them. Private sector banks, on an average, have performed better than public sector ones. If executed well, these portend an efficient banking sector, with significantly enhanced capability to raise capital to fund the economy’s growth.
The only negative of the Budget is the huge fiscal deficit and this can potentially hurt inflation and interest rates. RBI, through its monetary policy, has reiterated that the accommodative stance will continue till necessary. RBI has signalled its intent to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy.
However, inflation remains a concern and RBI seems to be watching it carefully. A deflation in vegetable prices keeps headline inflation under check for now, but it is possible that this does not sustain. Broad cost pressures in the services and manufacturing sectors coupled with increasing economic demand from urban areas, as Covid-19 fears recede, are likely to lead to an increase in core inflation. This, in turn, is likely to increase interest rates. Supply-side measures announced by the government become all the more critical to keep this vicious cycle in check.
The author is whole time director and member of Group Management Council, Kotak Mahindra Bank. Views are personal