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Clear pivot towards growth bringing together pragmatism with realism
3 min read.Updated: 02 Feb 2021, 12:39 AM ISTZarin Daruwala
The surprise the finance minister gave markets when she embarked on a spending increase, not just for 2021-21, but all the way till FY26 could have caused sentiments to go many different ways
The surprise the finance minister gave markets when she embarked on a spending increase, not just for 2021-21, but all the way till FY26 could have caused sentiments to go many different ways. However, it is the form, the manner and the intent with which she did so, that made this budget the most appropriate for the post-2020 economy.
India has been conservative in its fiscal push for the last three quarters compared with other large economies, however, by targeting a central government fiscal deficit of 6.8% of gross domestic product (GDP) for FY22, the government has shown a clear pivot towards growth. This focus is also apparent in the intent to return below 4.5% of GDP fiscal deficit target only by FY26, far above the previous target of 3% of GDP. Moreover, while expectations for FY22 deficit was between 5% and 5.5% of GDP, excluding off-budget expenses, by focusing on higher spend, especially on capex and infrastructure, and in recognizing otherwise off-budget spends on books , the impact and credibility of the budget has been boosted.
Despite no major tax changes, the revenue projections are realistic and may even surprise positively, starting with nominal GDP expectations at 14.4%, which could have a clear upside in the wake of significant fiscal impetus. The government’s own cash balances stand close to ₹2 trillion; add to this the ₹80,000 crore of borrowings in the next two months, together 1.7% of GDP is available for spending within this financial year itself.
Revenue estimates exclude potential 5G collections and benefits from the brownfield asset monetization programme enabled by the budget. The central government budget GST estimate of ₹6.3 trillion could see over-delivery, on the basis of the last few monthly collections of ₹1.1 trillion-1.2 trillion. The divestment targets of ₹1.75 trillion appear realistic and achievable.
From a financial market impact perspective, the wider deficit may appear prima facie bond-negative, and the actions of rating agencies will be closely watched. However, a higher GDP growth rate could potentially negate the adverse impact of increased debt levels. With the books balanced and a chance of upside on revenues, expenditure and its subsequent execution would be the next variables, which too has been admirably covered. By focusing on capital expenditure, pegged at ₹5.54 trillion, the highest in terms of share of GDP in 15 years, a significant multiplier effect could be realized, improving medium-term growth prospects across socioeconomic strata.
To ensure its benefit is well distributed, particularly in light of what some fear is a K-shaped recovery, the areas of focus have been well chosen, be it in increasing allocation to the production-linked incentive (PLI) scheme with its strong initial promise from an employment perspective, or textiles with its high employment potential and deep backward linkages.
The focus on health and education, in addition to traditional infrastructure, ensures the multiplier is well in play. Historically, railways have had a GDP multiplier effect of 5X; with roads offering a similar opportunity. Housing, too, is another significant multiplier, contributing 60% of cement and 35% of steel demand.
Further, monetizing brownfield public infrastructure through the National Monetization Pipeline adds to the dry powder available for greenfield assets in the National Infrastructure Pipeline.
Both the monetization of brownfield and investment in greenfield requires a robust long-term debt financing framework, where the proposed development finance institution, with a targeted lending portfolio of ₹5 trillion will play a key role. By easing debt financing of InVITs by foreign portfolio investors and removal of tax deduction at source (TDS) in InvIT dividend payments, this framework is further strengthened.
The proposed body to purchase investment-grade debt securities, the FPI measures above, and an overall increase in fiscal math transparency, show an understanding and acknowledgement of the importance of market-driven resource allocation.
In another key step towards a more efficient allocation, the government has looked to minimize the presence of its public sector enterprises in the economy to make way for new investment space for private sector, and made clear mention of its intent to privatize two public sector banks and one public sector general insurance company.
The finance minister has effectively resolved one of the longest-running asks, that the government should take the lead in stoking the animal spirits required to revive the economy and enable the private sector to follow through. It is time to ensure this admirable budget is a precursor to effective and impactful execution.