Union Budget 2021 India: The government has to mind the gap between its intentions and implementation
By K Kumar & Rumki Majumdar
Indian Union Budget 2021-22: Recently, a video had gone viral on the social media where a man collapsed at an international airport, and a medical student performed cardiopulmonary resuscitation (CPR) for 10 minutes to revive him. It has been 10 months since the nationwide lockdown and the government, too, has been performing CPR to revive the economy that collapsed by an unprecedented magnitude.
Policymakers ushered in a mix of Keynesian and Friedman policies in a series of several mini budgets through 2020. The Union Budget FY22 announced on February 1 was one more in this series with an equal emphasis on growth and social objectives. It is heartening to see the emphasis of budgetary allocation was on areas that have a higher multiplier effect and can help in generating employment and income among low-and-medium skilled workers.
With expenses budgeted to be high in the coming years, there is an ongoing debate about how the government will fund its expenses and mobilise resources for infrastructure; bank recapitalisation; and capital expenditure, which is expected to rise by 34.5% from last year’s budget estimates. At the same time, it has not raised taxes, and revenues are likely to be low because of subdued economic activity. For the government, bridging the gap between intention and implementation for many of these projects could be a challenge.
The government recognises the widening gap between expenses and revenue that may arise in the coming years. It also understands that the alternate option of higher borrowings, other than what it has already announced, will have implications on the country’s deficit, debt and yields. This will not only limit its ability to borrow and raise borrowing costs, but will also undermine the efficacy of the accommodative monetary policy impact.
To raise funds, the government is, therefore, relying on sources such as privatisation and monetisation of land assets, which have long gestation periods. The inflow of funds after the completion of the deal may stretch over a period of time. Besides, the government has had limited success in realising the scale of disinvestments announced over the past few years. Therefore, raising the targeted funds for such projects from private and foreign sources within the desired time is likely to be difficult than usual.
To the government’s credit, the disinvestment and privatisation plan is much more granular and has specific timelines for completion in this Budget. Given that the stock market is at an all-time high, a timely execution could help the government realise the full potential of its assets.
The second challenge will be how the government distributes its planned allocation of the budgeted amount for multi-year projects. Several of these projects with high multipliers are spread over a horizon of more than one year. India needs to spend and create jobs now to support the economic recovery that has just taken off. Therefore, the window for the government to spend and support the nascent recovery is short. If the share of total spending is more skewed in the later years of the timelines specified, then the economy may not get the desired spending boost it needs over the next year.
In other words, the government has to realise the sources of funds immediately and front-end its spending. For that, it has to ensure stability in policies and get the projects off the ground without these getting mired in regulatory and structural bottlenecks. Certainties associated with the completion of the projects will be key.
The government must also work towards exploring alternate immediate sources. It must tap into the rising household savings and broaden its tax base in the coming months. Improving compliance and plugging loopholes that encourage tax evasion could be a few smarter ways.
This Budget announcement is an indication that the government is determined to do all it takes to revive the economy and has ticked all the right boxes. It is also unlikely that this Budget will be the last one in the series. Therefore, it will be important to understand more specific details and clarity on spending, which, in turn, will determine the strength and pace of sustainable economic recovery.
Kumar is partner and Majumdar is economist, Deloitte India