Sharply focused, the budget boosts hopes of revival
There is nothing that sharpens the mind quite as much as a crisis. This was reflected in the brevity and precision of finance minister (FM) Nirmala Sitharaman’s budget speech, which was one-third shorter than her speech last year.
The budget signals where the government’s priorities lie. This government, in its fight against Covid -19, has had to bear the brunt of 70 years of underspending on health care. It has unsurprisingly focused on the sector through an expansion of expenditure on health and nutrition from ₹94,000 crore to over ₹2.2 lakh crore. As recommended by many economists, the budget provides a strong Keynesian stimulus. There is a significant enhancement of allocation to existing water supply and sanitation programmes. Highways and metro rail construction projects were prominent within the first 30 minutes of the FM’s speech. The common theme running through these sectors is that old-fashioned construction spending, funded by a capital expenditure programme, up from ₹4 lakh crore to over ₹5.5 lakh crore, should create a degree of demand transmission.
High-value infrastructure creation requires financial institutions to manage flows of capital. There is a proposal to create an Infrastructure Development Financial Institution to fill the space that was once occupied by IDBI, IFCI and IDFC. There is also an understanding that some markets will not develop unless the government steps in to create basic infrastructure. The proposal to create a market-making entity for investment grade bonds and the removal of tax restrictions on INVITS (infrastructure investment trusts) and REITS (real estate investment trusts) aims to address bottlenecks within these markets.
The government also needs to bring public sector banks, with non-performing assets (NPAs), back to the lending fold. It is addressing this reluctance to lend with the creation of a monolithic asset reconstruction company. This has a certain appeal. The Troubled Asset Relief Program in the United States, after the Lehman crisis, ultimately succeeded in recovering nearly 100% of its asset value. There is a logical belief that moving NPAs into such an entity will free banks to return to credit provision. What needs to be ensured is that these assets are transferred in a transparent manner at the right value, which does not paper over the true NPA levels of the selling banks. The budget recognises that India’s problems are uniquely messy and require a preparedness to compromise on small inefficiencies. The reduction of tax audits for small companies, a commitment to not reopen income tax assessments after three years, and the simplification of tax filing for senior citizens may not make a difference to the economy as a whole, but helps focus state capacity in areas that are more useful.
A consequence of this overall approach is move into a high-deficit regime. This year’s fiscal deficit of 9.5% is the highest since the 1991 crisis, and the government will be living with deficits of at least 4% until 2025-26. This is a dramatic commitment from the government to prime the pump of the economy. There was a fear that, faced with a crisis, the government would resort to an aggressive taxation programme which would stifle demand. Through a Marshall Plan-like commitment to spending on infrastructure and health expenditure, and yet largely permitting private sector animal spirits (such as they remain after Covid-19) to remain intact, the government has balanced some very difficult priorities.
The plans articulated in the budget are largely within the government’s control. This is in contrast to budgets that focus on reduction in duties, offering tax breaks or steps to attract capital — all of which depend on the response of the private sector. To that extent, one can feel a little more confident about the successful consummation of the activities in this budget. In the budget, by focusing on a few objectives, the government has perhaps achieved more.
Govind Sankaranarayanan, a former COO and CFO of Tata Capital, is currently vice chairman at ESG Fund ECube Investment Adviser
The views expressed are personal