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Home >Budget >Opinion >FM presses the right buttons with focus on health, PSU sales and banking

Against the backdrop of a pandemic-battered economy, the Economic Survey 2020-21 called for a counter-cyclical fiscal policy and advocated that the fiscal policy at least in the near term will have to remain at the centre stage to support growth. And once growth picks up in a sustainable manner, fiscal consolidation can return as a key agenda. The Union Budget for FY22 presented by the finance minister did live up to this suggestion, and the fiscal deficit of FY22 is budgeted at 6.8% of gross domestic product (GDP). Even for FY21, the fiscal deficit is pegged at 9.5% of GDP as against the budgeted 3.5%.

Throughout FY21, saving lives and livelihoods was a key theme of policymaking. The revised estimate of FY21 shows that although there has been some expenditure compression under heads such as agriculture and allied activities, telecommunications, power, railways, women and child development etc, simultaneously there has been significantly higher expenditure under heads such as food and public distribution, rural development, direct benefit transfers for vulnerable sections of the society, health, fertilizers, etc. Therefore, as against the budgeted expenditure of 30.42 trillion in FY21, the revised estimate shows an expenditure of 34.50 trillion, an increase of 13.4%. To fund this government has taken recourse to both local and external borrowings and plans to borrow another 80,000 crore from the domestic capital markets over the next two months.

The Union budget FY22 extends the expenditure pattern adopted in the FY21 budget by allocating more resources to public health ( 35,000 crore for covid-19 vaccination), Mahatma Gandhi National Rural Employment Guarantee Scheme, affordable housing segment, micro small and medium enterprises, rural development, etc. However, closer scrutiny of FY22 numbers suggests that this increase is over the FY21 budget estimate and not the revised estimate. For a number of heads, the FY22 budget estimate is significantly lower than the revised estimate of FY21. This is understandable as the need to spend on these heads in FY22 is no longer as much as it was in FY21. Another challenge the government finances face is expenditure rigidity because of which makes it difficult to rationalize/reorient spending sufficiently in favour of the heads that really need it.

Despite the focus on infrastructure in successive budgets, infrastructure financing has been a sore area. The FY22 budget, by announcing the setting up a development finance institution (DFI) with a corpus of 20,000 crore, will go a long way in filling the gap created by the demise of erstwhile DFIs, namely ICICI, IDBI and IFCI. DFIs, unlike banks, besides bringing in the knowledge of project financing, are also known to have patient capital suited for infrastructure financing. Further, debt financing of InVITs and Reits by FPIs and monetization of operating public assets is another right step towards infrastructure financing.

Due to various policy measures and moratorium, the banks are yet to witness the full play out of non-performing assets that the pandemic may have caused. It is quite likely that with the moratorium period and restructuring window closing the balance sheets of banks will witness a rise in delinquency in the coming months. Therefore, the announcement of recapitalization of the public sector banks (PSBs) to the tune of 20,000 crore will be helpful in creating buffers/meeting capital adequacy norms of the PSBs. This will ensure credit flow in the economy. The FY22 budget has fulfilled the demand for the creation of a state-owned asset reconstruction company/asset management company had been a long-standing demand.

Turning to the revenue receipt, the revised estimate of FY21 shows that besides tax, even non-tax revenue, especially disinvestment, has been a major drag on government finances. It shows that the government is expected to mobilise only 32,000 crore against an ambitious target of 2.10 trillion. The target for FY22 is 1.75 trillion. With equity markets at a high this perhaps is the most opportune time to for the Centre to pull all stops to achieve this target. In fact, the FY22 budget arithmetic hinges on this. It assumes nominal GDP growth of 14.4% and gross tax revenue growth of 16.4%, which is plausible. Not tinkering with income/corporate tax is Corporate tax had been rationalized in FY20. Income taxpayers were given an in the FY21 budget to opt either for the older tax regime with an exemption or a new regime sans exemption. Announcements related to procedure/tax return/dispute resolution, including the exemption for senior citizens of 75 years of age and above from filing I-T returns are welcome steps.

Sunil Kumar Sinha in the Principal Economist, India Ratings & Research.

The views expressed are personal.

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