Growth push scores over prudence

The Budget announcements by the Finance Minister, made in the background of the pandemic, have largely been on expected lines expect that the fiscal deficit number has turned out to be much larger than expected. The expectation was that the fiscal deficit in the current year would be 7.5 per cent, which turned out to be 9.5 per cent of GDP.

For 2021-22, the expectation is that the budget deficit will be kept around 5.5 per cent of GDP, but the Finance Minister has projected a higher fiscal deficit number of 6.8 per cent of GDP. This increase can be attributed to the fact that the Government has decided to discontinue the practice of giving loans to the Food Corporation of India (FCI) and bring the subsidy to FCI transparently in the Budget number. This has increased the deficit number by about 1 per cent. This is, however, welcome and in the interest of fiscal transparency and data integrity.

The policy premise of the Budget, which was also elaborated in the Economic Survey, is that the job and output multiplier effects of non-defence expenditures should be harnessed without worrying about inflation and borrowing cost, especially when the global market is awash with liquidity. Based on this philosophy, capital allocation in infrastructure segment like roads, railways, shipping and petroleum has been substantially enhanced.

In order to access low-cost long-term pension and insurance fund, the government has also decided to create a Development Financial Institution (DFI) for which legislation is being brought in this session of parliament. This institution will leverage its capital to attract global funds for completion of more than 7,000 projects identified in the National Infrastructure Pipeline.

The second important feature of the Budget is the proposed financial reforms. Here, the government has decided to bite the bullet by announcing the privatisation of two public sector banks which would require amendment to the Bank Nationalisation Act. This is a bold move, which was suggested by many economists as the most viable way forward.

Further, the government has also decided to create a bad bank in the form of an ARC (asset reconstruction company) and AMC (asset management corporation) to take in its account all the NPAs of banks and NBFCs. Here, the design of the bad bank is important. Ideally, it should be tested in the private sector and comprise a set of specialised bad banks for sectors like real estate and power so that the management can be vested with experts who can extract the best value out of these bad assets.

Third, the government has used the opportunity of the Covid crisis to substantially hike the investment in the health sector from about 1.5 per cent of GDP to 2.5 per cent. This is being done through a centrally sponsored health scheme named ‘Prime Minister Atmanirbhar Swasth Bharat Yojana’, at an outlay of ₹64,180 crore. This amount would be used to strengthen the testing laboratories of primary health centres and other medical institutions.

This scheme is also being combined with another to improve access to water and have better sewage facilities in urban India. This is an important initiative in the area of preventive healthcare (most of the diseases in India can be traced to poor water quality contributed by inadequate sewage facility). The improved infrastructure will help Indians reduce their out-of-pocket health expenditure which, at 65 per cent, is the highest in the world.

In the announcement made in Part B of the Budget speech, there were no major changes in the direct and indirect tax rates. The taxation sting was at the end of the Budget speech when the Finance Minister proposed the imposition of an Agriculture Infrastructure and Development Cess (AIDC) on specified goods — including alcoholic beverages, petrol, diesel, gold, silver, cotton, peas and apple. The emphasis on process improvement in taxation was based on the assumption that ease of paying taxes would help in tax buoyancy.

One can see in the Budget proposals a determination to pursue growth even if it means a temporary fiscal slide-back. It’s hope is that more growth will lead to more jobs, reduce poverty and reverse the recent increase in debt-GDP ratio.

The writer is National Leader - Tax & Economic Policy Group, EY India. The views expressed are personal