Its growth-supportive moves and the transparency it bestows on central accounts deserve applause
A few days before the budget, the Controller General of accounts had updated the government accounts for December. With that, nine months of data for 2020-21 are now available. Total revenues were at nearly 50% of the budgeted levels. Given that disinvestment receipts have been non-existent, this was a rather creditable achievement. Total expenditure was at nearly 75% of what was budgeted, as one would expect. Even that was creditable, as spending the money was not easy when the nation was either fully or partially locked down.
On the macro front, the International Monetary Fund published the January update of its World Economic Outlook. For India, the Fund lowered its estimate of gross domestic product (GDP) contraction to 8.0% for 2020-21, while upping the number for 2021-22 to 11.5%. Its earlier estimate was 8.8%. One assumes that its upward revision was largely influenced by the absence of a second wave of infections, as is being experienced by many other countries. It was in this backdrop that the finance minister rose to present her budget.
With any budget, the translation of outlays into outcomes is a matter of execution and is visible only through time. When it comes to several big-ticket announcements, over the last six years, this government has more successes than failures. But, commenting on outcomes is relatively premature. Second, budgets have omissions and commissions—both good and bad.
A good omission is the absence of further income-tax rate reductions or higher exemption limits. The country’s taxable income starts at a much higher level relative to per capita income. It is the opposite for developed countries. Therefore, not announcing further income tax relief is a good thing. At the same time, the proposed procedural improvements are substantial, whether for senior citizens, re-opening assessments, or with respect to pre-filled income tax forms. The government has stuck to the path of faceless assessments and appeals despite implementation hiccups and cynicism in some quarters. These are commendable.
It has also set up a bad bank. This columnist wrote that this was unnecessary and that re-activating the insolvency and bankruptcy process (IBC) would be adequate, given that public sector banks had already made high provisions for bad assets. This argument overlooked the potential for bad assets to increase with a lag, given the covid-induced contraction of 2020-21. Also, having bad assets on bank books gives managements ‘skin in the game’ on loan recovery. Equally, removing them from the books frees them up to make new loans. So, the proof of the pudding will be in the recovery that is achieved by the proposed ‘bad bank’. For making a new beginning, reforms of the governance of public sector banks would have completed the structural reform process, as distinct from privatization and recapitalization. On the face of it, they were missing. However, there was no indication of a further postponement of the IBC process’s reactivation. That is good news, indeed.
Further, banks, with their short- horizon deposits, were not equipped to undertake long-term infrastructure funding. So, the government is right to revive the idea of a development finance institution (DFI). The minister also indicated an ambitious target of infrastructure financing for this new institution. Critical to its success will be the absorption of lessons from India’s past experience with such DFIs.
This one is for nerds. I don’t think I am imagining it. The number of statements that are available for download is far more than in the past. This speaks of a sincere attempt to provide more information than less. Statement 27 of ‘Expenditure Profile’ indicates a huge clean-up of the recourse to ‘Internal and Extra Budgetary Resources’. That explains the revised gross fiscal deficit (GFD) estimate of 9.5% for 2020-21, with many things now above the line that were below it. One can see that in the ‘revised estimate’ for food subsidies. This is a huge plus for transparency.
Further, the government’s revenue estimates (net to the Centre and net of borrowing) for 2020-21 are ₹16 trillion and ₹19.8 trillion for 2021-22. The latter is lower than the original budget estimate for this year. This is despite assuming that the nominal GDP for 2021-22 at ₹223 trillion will end up near the original budget estimate of ₹225 trillion for this year. Savour that for a moment. Arguably, for the first time ever, an Indian government has chosen to go fully clean on Internal and Extra Budgetary Resources, refrained from engaging in the gimmickry of borrowing from its own enterprises (issuing special bonds to them), and under-promised on revenue with every likelihood of over-delivering on the estimated budget deficit of 6.8% for 2021-22. This sets a very high bar on fiscal transparency and conservatism for future governments too. For this alone, the minister and her team deserve a full-throated cheer, just as the Indian cricket team earned our admiration a few weeks ago. They have kept it simple, just as the cricket team did with such telling effect. This budget will stand India in very good stead for 2021-22 and beyond.