4 min read.Updated: 19 Jan 2021, 01:15 PM ISTRanen Banerjee
''We can fairly expect a much higher allocation of expenditure for infrastructure sector than has been the trend. The allocations to the health sector will be higher, given the weaknesses exposed in the sector by the pandemic.''
Given the loss in national income and consequent dips in per capita income, demand generation should be the key focus for the government in the upcoming Union Budget. The demand generation has to be through generation of employment and putting more money in the hands of the consuming masses to spend. We can therefore fairly expect a much higher allocation of expenditure for infrastructure sector than has been the trend. The allocations to the health sector will be higher, given the weaknesses exposed in the sector by the pandemic.
Given the developments in the farm sector and pledge of the government to double farmers’ income, allocations to strengthen agriculture infrastructure - especially storage infrastructure like silos and cold chain – are also likely to be higher.
The worst impacted sector due to the pandemic has been travel and tourism. This sector will need some support as it contributes greatly to employment and can fuel demand. The government may consider providing some indirect support to the sector by way of higher LTA or an additional LTA claim in the current block for the salaried.
The government could also consider a one-time special standard deduction for incomes up to ₹1 million (10 lakh) towards pushing more consumption and hence demand generation. The revenue lost by this measure will be more than made up through the demand generated in the economy from the same by way of additional indirect taxes and possibly some direct tax impact also.
Infra projects that are over 90% complete and those that could be completed in the first half of the fiscal before onset of the monsoons should get maximum allocation. This will make those projects operational before onset of monsoons. These projects can then be monetized and capital unlocked through TOT modes for them within the financial year itself thus making them deficit neutral. The process for monetizing them should begin immediately so that they can bring in the revenues during the year itself allowing for the higher expenditure allocations without impacting deficits negatively.
The buoyancy in GST revenues being experienced owing to efficiencies brought in the system as well as increasing formalization through digital transactions and ecommerce in the economy. The higher GST and formalization will also lead to some rub off on the direct taxes from the non-salaried class too. It will also therefore give an additional revenue boost to offset revenue loss on account of additional standard deductions that may be provided to the salaried class.
With GST revenues touching ₹1.15 trillion in December 2020, we can fairly expect it to average ₹1.25 trillion per month in FY22. This will be about ₹25,000 crore additional per month revenue for the government. Taking approx. 50% of this into the central government kitty, it will be approx. ₹12500 crore of additional revenues that translate to ₹1.5 trillion of annual additional revenues which is about 0.75% of GDP additional cover in terms of resourcing.
The government also needs to focus on procurement efficiencies that can provide a savings of at least ₹25000 crore for the central government. An undertaking to provide payments for valid invoices to suppliers of government within 30 days will also bring down the cost of goods and services supplied to the government. A discount percentage on Directorate General of Supplies and Disposals (DGS&D) rates as a procurement parameter with an undertaking for payments to be made by the government within 30 days will bring in immense savings to the government.
Given the easy monetary policy and liquidity conditions prevailing globally that has had a positive impact on the capital markets, the process of divestment needs to be speeded up for the non-strategic PSUs as announced under the Atma Nirbhar Bharat scheme. The Government can get lucrative valuations for the investments that have been made in these PSUs in the current market conditions. These revenues will add to the firepower in the Finance Minister’s arsenal to pump prime the economy.
Private sector investment appetite would possibly come back towards end of FY22 with majority of population having been vaccinated globally and trade, commerce and travel resuming without restrictions. Till then the economy will need a pump priming from the government given business as usual demand and capacity utilization remaining weak through majority of the year. We will also have to build resilience for the taper tantrums that could be experienced in early FY23 once the monetary policy begins swinging to tightening across the globe in FY23.
Thus, we can expect an expansionary budget with higher deficit targets to the tune of 6% for the next fiscal with a commitment to bring it down to 4.5% in FY24 and 3.5% in FY25. Such a glide path will also assuage the credit rating agencies and mitigate any risks of a sovereign downgrade.
Banerjee is Leader Economic Advisory Services at PwC India. Views expressed are his own.