Union Budget 2021-22: Post-COVID a great budgetFebruary 6, 2021
By Malachy Nugent,
Indian Union Budget 2021-22: The FY22 budget Finance Minister Sitharaman unveiled on February 1 presents a credible policy framework for the coming fiscal year and an important shift from short-term disaster relief to medium-term economic recovery. Increased government spending on capital projects and policy measures to promote private and foreign investment will provide a foundation for sustainable growth once the current crisis is past.
Finance ministries around the world have accepted the imperative of increased deficit spending in this crisis period, and India is no different. A much-needed fiscal consolidation has been put on hold as the fiscal deficit reaches 6.8 percent of GDP this fiscal year, well below the 3.0 percent target laid out by the Fiscal Responsibility and Budget Management Act (FRBM). The government will finance this deficit through a sharp increase in market borrowing, up 54 percent in volume terms from pre-pandemic levels, buoyed by accommodative monetary policies and historically low global interest rates.
Importantly, however, the composition of this deficit spending is shifting away from direct income support and toward capital expenditures that have a greater impact on medium-term growth. After spending nearly 13 percent of GDP since last March on COVID-related disaster relief, the government now plans to increase investment on medium-term priorities in public health, employment generation, affordable housing, support for small business, and development of the rural economy. Total capital expenditures are scheduled to rise by nearly 50 percent, to $71.3 billion, with significant outlays in defense, railroads, roads and bridges, public works, and power, creating major opportunities for private and foreign investors to contribute to India’s long-term productive capacity.
On the revenue side, the government has made an important choice not to impose significant new taxes or cesses and instead focus on improving tax administration and collection, trusting that revenues will pick up again once the economy returns to some approximation of normalcy. (Indeed, GST receipts have already seen a resurgence in recent months.) By broadening the effective tax base instead of raising tax rates, India makes itself a more attractive destination for foreign capital and supports the private investment and consumption that will drive India’s recovery.
Privatization of state-owned assets will also give a much-needed boost to India’s productive capacity. The government has announced it will finally complete some long-overdue sales in 2021-22 (e.g. Air India) while launching some new sales, notably in the banking and insurance sectors. Though India regularly overpromises and underdelivers on its privatization targets, the combination of intense fiscal pressure, a rising stock market, and significant pools of foreign investment capital increase the chance of success this year.
Policy measures intended to facilitate finance and investment will also have a significant impact, if implemented. For example, the proposal to increase the cap on foreign direct investment in insurance to 74 percent and relax related management control restrictions could generate increased foreign investment in that sector by over $12 billion over the next five years, providing more financial security for Indian citizens in times of crisis. Sale of two public banks, creation of a new Development Financial Institution, consolidation of a new Security Markets Code, and initiatives to support liquidity in the corporate bond markets are all welcome improvements that will facilitate foreign investment in business and infrastructure.
Though it may not be obvious at first, the common line running through all of these proposals is enhanced support for private business and investment, including from foreign investors, in India’s long-term productive capacity. That is exactly the right focus now, as we move slowly but surely towards the post-COVID recovery. As always, the devil will be in the details, and even the best policy proposals can founder upon execution. But with consistent commitment to productive investment, private enterprise, and access to foreign capital, 2021 will be a year of economic rebound, recovery, and growth in India.
(The author is the Vice President, Financial Services at USISPF. Views expressed are personal and do no reflect the position or police of the Financial Express Online.)