Home / Budget / Opinion /  The fiscal stance creates space for transformation

When faced with a once-in-a-century economic shock in 2020, policymakers across the world had to reassess their thinking on deficits and government debt. Some advanced economies pushed up their deficits to 15%-plus of GDP. A few developing economies also followed suit. This was deemed necessary to lift the economies out of the abyss and to break out of a potentially vicious circle of low growth, low tax collections and rising debt-GDP levels. For India, the 2021 Union budget has probably been that moment of spelling out a new thinking on fiscal policy.

In a refreshingly bold approach, the government has not only accepted a wider fiscal deficit for now, but has penciled in a medium-term path that balances between fiscal consolidation and the imperative for the government to take a leading role in making India’s infrastructure future-ready for a $5-trillion economy.

The medium-term glide path of bringing down the fiscal deficit to 4.5% of GDP by FY26 is realistic and creates the fiscal space for more growth-enhancing measures. More importantly, the government has not been reckless in using this fiscal space. It is commendable that the budget has targeted to reduce revenue expenditure in FY22 vis-à-vis the current year, even while boosting the capex significantly. This marks an improved quality of government expenditure.

The government’s capex plans seem to be focused mainly on roads, railways and other infrastructure sectors. And, the government is not stopping at just spending more from its own pocket. There seems to be a well-thought-out package to galvanize the National Infrastructure Pipeline (NIP) – by incentivizing states to provide more capex, creating a mechanism for monetizing brownfield infrastructure assets, instituting a development finance Institution, allowing tax-free infrastructure bonds and removing the impediments for sovereign wealth funds’ investment in infrastructure projects.

These bring far more visibility and definitiveness to the NIP; and have the potential to transform the skyline of India’s infrastructure.

While the initiatives on infrastructure seek to build, the new initiatives for resolution of stressed bank assets and for reforming the power distribution sector are meant to repair. Both these legacy problems have been a drag on the economy, and it is important that they are addressed quickly.

As expected, the budget has put a lot of thrust on building India’s healthcare capability. The provision for healthcare and well-being has been more than doubled, which is quite remarkable. There are also provisions for gig workers and building and construction workers, which recognizes the vulnerability of migrants. Like in the previous years, agriculture, micro, small and medium enterprises and education have received higher allocations. These reflect that the spending plan has its priorities in the right place.

The budget’s thrust on disinvestment and privatization is also noteworthy. As the FM said, idle assets cannot contribute to nation building. So, the government has planned a special purpose vehicle to monetize assets such as surplus land with government departments and public sector enterprises.

Given the approach announced by the government towards restricting the play of the public sector to just the strategic sectors of the economy, one expects the privatization agenda to see a significant momentum over the next few years. The announcement regarding privatization of two public sector banks and one general insurance company next year reflects the clarity on this pathway.

For the financial sector, the budget made many announcements, which build upon the reforms that have happened in the earlier years. Allowing 74% FDI in the insurance sector will help to further improve the penetration of insurance in India by bringing in more long-term capital in this sector.

Creation of a new institution for imparting liquidity to the corporate bond market will help resurrect confidence in this segment. Introduction of investor charter for all financial products will improve investor protection and will ultimately help increase the penetration of financial products by boosting investor confidence. Along with the step for resolution of NPAs, all these measures will help in making the financial sector more robust and capable of supporting the increased needs of the real economy.

Since the unlock measures kicked in, we have witnessed some strong signs of recovery in the economy. This budget, with its bold strokes, will help the Indian economy to capitalize on those green shoots—not just for the near future, but well into the medium-term.

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