Nirmala goes for broke to push growth

In the end, it was neither the flamboyance of a Rishabh Pant nor the doggedness of a Cheteshwar Pujara that was on display in the Union Budget 2021-22 presented by Finance Minister Nirmala Sitharaman. On exhibition was a judicious blend of aggression and caution that is more the style of an Ajinkya Rahane. And the spectators in the stock market applauded pushing the BSE Sensex up by 5 per cent, or 2,314 points, the third highest rise ever seen on a Budget day in the market bellwether.

In a borrow-and-spend Budget that is probably antithetical to her conservative roots, Sitharaman responded to calls for a demand stimulus with gusto but it was not tailored as giveaways to the poor or as tax-breaks for the middle-class. Instead, she chose the classic textbook method of pushing expenditure on infrastructure that has a trickle-down effect across the economy.

Thus, capital expenditure is estimated at an all-time high ₹5.54-lakh crore, 34.5 per cent more than the FY21 Budget Estimate of ₹4.12-lakh crore and 26 per cent more than the Revised Estimate of ₹4.39-lakh crore. She has devoted special care and attention to the poll-bound States of Tamil Nadu, West Bengal, Assam and Kerala by showering them with investments in new highways and metro projects.

Steps up expenditure

In fact, Sitharaman has done well in not just maintaining the accelerated expenditure of the ongoing fiscal but actually increased it by a notch to ₹34.83-lakh crore in FY22 compared to ₹34.50-lakh crore in the current fiscal. That expenditure is being maintained at elevated levels is notable considering that the higher outlay in the current fiscal is due to extraordinary circumstances where the government was forced to do the heavy lifting to keep the economy going. The government, it appears, wants to take the onus on itself to maintain the growth momentum and rightly so too.

The outlay on health has been pushed up manifold to ₹2.23-lakh crore from ₹94,452 crore in FY21 and Sitharaman has set aside ₹35,000 crore for the Covid vaccination programme with the promise that more will be given if needed. Under a new scheme, PM Atmanirbhar Swasth Bharat Yojana, ₹64,180 crore will be spent over the next six years on setting up primary, secondary and tertiary health care systems across India.

Increasing taxes or introducing newer levies was obviously not an option given the state of the economy now. And that left Sitharaman with the only option of borrowing and she did not shy away. Gross borrowings at ₹12-lakh crore is about the same level as in the Covid-affected FY21. The bond market shivered in the immediate aftermath of the speech with yields on the 10-year government bond rising 13 basis points to 6.06 per cent. As the full impact of the borrowing programme sinks in, it is likely that yields will go higher in the next few days.

There are also jitters over whether the government will crowd out private borrowers from the market, but this should be viewed against the fact that banks are sitting on enormous liquidity and with the asset reconstruction company taking over their stressed assets, banks can lend without a hangover.

Ratings agencies may frown as fiscal deficit targets have been consigned to dust-bins thanks to the pandemic. The current fiscal’s deficit target has been set at a whopping 9.5 per cent beating most estimates by a wide margin and that for the next fiscal has been set at 6.8 per cent, which is again much higher than expectation. What’s worse, the glide path has effectively been pushed to the medium term with the target set at below 4.5 per cent in 2025-26. Contrary to the aggression shown on the spending side, Sitharaman has chosen to play with caution when it comes to estimating revenues. The Budget is built on the assumption of a 14.4 per cent nominal growth in GDP (translating to around 10 per cent in real terms if one assumes inflation of 4.5-4.8 per cent) with tax buoyancy of 1.15, which is probably not unrealistic. Again, compared to the unrealistic estimates of the past on disinvestment, the target for this year is set at ₹1.75-lakh crore, much lower than last year’s. With a strong pipeline of companies such as BPCL, Concor, and Shipping Corporation, and with planned IPO of LIC likely to fructify, this target looks achievable.

Sitharaman has also strongly pitched for a well-tailored asset monetisation programme of government assets ranging from railway operations to sports stadiums but the implementation has to be watched closely.

Questions are bound to be raised on the lower provision for social sector schemes such as NREGA and PM Kisan, both of which have lower outlays than the Revised Estimates for the current fiscal. For instance, the NREGA will get ₹73,000 crore in FY22, much lower than the RE of ₹1,11,500 crore in FY21. The allocation is higher though compared to the budgeted estimate of ₹61,500 crore in FY21. Subsidies on food, fertiliser and petroleum have been sharply marked down compared to the revised estimates of FY21.

The stock markets loved Sitharaman’s proposals on banking and insurance. The promise to set up an asset reconstruction company that will take over the stressed assets of banks, recapitalisation of ₹20,000 crore and the proposal to privatise two public sector banks next fiscal, in addition to IDBI, which is already in the pipeline, sent banking stocks soaring. The markets also welcomed the proposed increase in FDI to 74 per cent for insurance companies along with full foreign ownership and control subject to safeguards. The Finance Minister once again spoke about the idea of setting up a development financial institution, something that she mentioned in an earlier Budget.

Protectionist face

The protectionist face of this government surfaced in the rejig of import duties which have gone up for a laundry list of items ranging from mobile phone parts to auto components, leather, compressors used in ACs and refrigerators and even tunnel-boring machines used in metro construction. If this is aimed at promoting domestic manufacturing of these products, the verdict will have to wait.

For the aam admi disappointed at not getting a tax-break, Sitharaman has sought to smoothen feathers by easing compliance norms such as exempting senior citizens over 75 years of age from filing returns if their income comes only from pension and interest. She has also thrown in assorted concessions such as a reduction in the time limit for reopening of assessments to three years from six years currently and clarifying that advance tax liability will arise only after dividend is paid.