Union Budget 2021 India: If that is done, it will reduce the dependence upon the bond market, and the costs will also be lower for govt
Indian Union Budget 2021-22: There is much excitement about the budget math. The recovery may have been faster-than-anticipated, but we are not out of the woods yet. So, everyone’s keeping their fingers crossed, the government has planned for a relatively big balance sheet in FY22. What is needed is generous spending on welfare schemes to help the poorer households and provide them with jobs, and big investments that will create employment.
For off-budgetary capex, the government should tap household savings lying idle in banks, through PSU bonds. Given the nominal contraction in GDP of 4.2% this year, economists are pencilling in a robust rebound of 15% next year. And they are hoping for an expenditure budget of Rs 33-34 lakh crore, based on total receipts of about Rs 21-22 lakh crore. That would cheer everyone except the bond markets because an expenditure of that magnitude would then leave a fairly wide gap of about Rs 12-13 lakh crore.
One hopes the government has pegged expenditure for the next year at least at Rs 33 lakh crore; about 10% more than the anticipated bill of Rs 30 lakh crore for the current year. However, it would be a smaller increase than budgeted initially in FY21 at Rs 30.42 lakh crore, up from Rs 26.9 lakh crore in the previous year. Hopefully, the government would have drawn up a bigger balance sheet, shrugging aside the fears of rating actions. The economy needs a big push at a time when there is virtually no private sector investment taking place.
While the top Indian companies with the finest brands are back on track, one doesn’t know how well the larger universe of 2-3 lakhs of small enterprises are faring in an environment where the organised sector is taking away share from the informal sector.
The good news is that tax collections are expected to be reasonably robust next year, thanks to better corporate earnings that are estimated to increase by 25-30% and bigger consumption spends arising out of pent-up demand. Some believe gross tax collections could increase by as much as 25%, to around Rs 25 lakh crore, as the Covid-19 infections subside, trade and industry get back on track, supply chains are restored, and consumer confidence rises.
Most high-frequency indicators do point to improving business activity, though the trends are somewhat uneven; factory output, for instance, remains poor. Very critically, the comeback in services has been slower—still 30% below the pre-pandemic levels—and services account for a chunky 55% of the economy.
Corporate earnings for the December 2020 quarter, however, have been very good and the trend could well continue through FY22 driving up corporation taxes by a good 20-25%. Given the unending hikes in levies on auto fuels, and the fact that volumes too are picking up, excise duties will continue to contribute a fair share to the tax kitty. In all, therefore, the Centre is likely to net some Rs 16-16.5 lakh crore as net tax receipts. While disinvestments have fetched the government very little in FY21—though there is still time—they should hopefully bring in much more next year.
The point is that the bulk of deficit, say, about Rs 10- 11 lakh crore, would need to be funded by the bond markets. The biggest investors in government securities—banks—have made big gains on their bond portfolios this year and will be loath to give them up. They have enjoyed a huge liquidity surplus; India’s banking system has seen a liquidity surplus for the last 19 months. While the surplus in the week to January 22 was about Rs 5 lakh crore, there have been weeks in which the amounts have been far higher at Rs 6-7 lakh crore. The reasons for this surge in liquidity are the large dollar purchases by the Reserve Bank of India (RBI)—some Rs 4.3 lakh crore between April and October 2020—as also the several OMO purchases and LTROs. Equally important, deposits are pouring in; the incremental growth in deposits between March 2020 and January 1 was 8.5%.
However, banks want to lend very little of this—the loan growth in the same period was just 3.2% and that too thanks to the government-supported scheme for MSMEs. One doesn’t blame them because there aren’t too many creditworthy borrowers; the spike in loan losses and provisions seen for the December 2020 quarter make that amply clear. So, it is not clear how soon the banks will shed their aversion to risk and start lending meaningfully. But unless credit flows ease, the large numbers of small enterprises can’t recover fast; the fiscal stimulus thus far has been rather small at about 2% of GDP.
It is better the government taps into the household savings—through off-budget borrowings—at attractive interest rates. This way, the savings would be far better utilised. To ensure that the government’s borrowing programme goes through, RBI may need to placate the petulant bond market. If the deposits are tapped—off-budget—the dependence on the bond market can be reduced.