Budget 2021 comes in the backdrop of the optimism of the economy turning the tide from an estimated 7.7% contraction in 2020-21 . The Economic Survey projects India’s real GDP growth to be 11% in 2021-22 , which is arrived by an implicit assumption of 4.4% inflation and a nominal GDP growth of 15.4%. This double digit growth projection is on a very low base and it is important to highlight the fact that even if these numbers are realised, this growth path would entail a real GDP growth of 2.4% over the absolute level of 2019-20; this means that the Indian economy would take two years to reach and surpass pre-COVID-19 levels. This echoes the intensity of the abnormal times for the economy — which requires non-standard policy responses, and which was the expectation from Budget 2021. Those who designed the Budget, in turn decided to maintain incrementalism and continue business as usual.
The Finance Minister’s speech eloquently laid out the six pillars on which the vision of the Budget rested . As expected, the health sector was the first pillar with enhanced outlays, which have been spread over the next six years. While this strategy of spending over the medium term presents the so called ‘road map’, the yearly outlays get subsumed by the big numbers announced. The immediate outlays are of significance in the present circumstances, when the overall demand in the economy is tepid.
The construction of the six pillars, which was expected to be on the current year’s enhanced expenditures, seems to be a bit misplaced, with very little increase in the overall expenditure of the government. The fiscal arithmetic provides evidence of this as the total expenditure for 2020-21 is stated as ₹34,50,305 crore in the revised estimates, with a capital expenditure at ₹4,39,163 crore. The Budget estimates for 2021-22 states the total expenditure at ₹34,83,236 crore. This means an additional spending of just ₹32,931 crore, which is less than even 1% in a year of income contraction for a vast majority of the population.
No multiplier effects soon
However, the big bet for growth and employment generation, capital expenditure, increases by 26% but still accounts for only 15% of the total expenditure. This increase in capital expenditure, which is expected to be channelised via the infrastructure push, in turn bears two risks at the moment. First, there is the risk of delay in completion, which leads to cost overruns. Second, as the life cycle of these projects is long, an inventory of funding needs to the ready in the pipeline. Thus, the immediate multiplier effects to lift the aggregate demand in the economy might not emanate as quickly as expected.
Sector-specific targeted proposals, barring production-linked incentives for industry are few as agriculture and the micro and small industries segment — which shores up demand with their consumption multipliers — seem to have been accorded lower priority
There are no radical reform proposals for the agriculture sector, with no announcements with regard to bringing urea under the nutrient-based subsidy regime or rationalising the Public Distribution System issue prices of foodgrains. In fact, the recent growth performance of the sector has led the Finance Minister not to have any increase in cash transfers under the Pradhan Mantri Kisan Samman Nidhi Scheme (PM-KISAN) from the existing ₹6,000 per year.
Manufacturing growth, which is expected to be a catalyst in pushing the economy toward the $5-trillion economy goal (by 2025), would depend entirely on how private investments pick up. While the textile sector is the focal point to push employment and industrialisation, a lack of concrete policies towards export promotion at a time when the exchange rate is appreciating and a pedalling with tariffs to increase protection is frequent, might undermine the competitiveness of manufacturing exports.
The creation of a development finance institution addresses one the three issues that infrastructure provisioning faces in the economy. While the financing part can be addressed to some extent by this new entity, the other two — execution risk and regulatory issues — are still left wide open. This new institution can be seen as the first step toward cleaning up the financial sector as the amount set aside for the recapitalisation of public sector banks looks short of the requirement. Given the emphasis on start-ups and one-person companies, the stress on the financial system in the coming years is likely to increase as these firms are more prone to the cycles in the economy.
Urban unemployment left out
The growth push of the Budget subsumes the welfare implications, which is the hallmark of the ‘new welfarism’ model of the present government. Both employment and demand generation are left largely to the vagaries of growth cycles. While extending the social security benefits to gig economy workers is a welcome move, the lack of a concerted plan to tackle urban unemployment might prove costly, given the demographic profile and pace of urbanisation of the country.
The Budget sets out some grand plans and does not provide the precise mechanisms to achieve those. However, it does attempt to spell out some institutional changes in major areas such as tax administration and provides a push to public sector research and development. The digital push to Census operations might be a long-term investment towards publishing vital data about the economy, quickly and in time.
Resources and spending
Importantly, the Budget is candid on the fiscal deficit numbers and sets out a slow fiscal glide path. However, the resource mobilisation for spending seems to be banking on disinvestment, privatisation and asset monetisation. The route for reducing fiscal deficit, from 9.5% to 6.8% of GDP, rests on three components: the benefit of a stronger denominator because of better nominal growth, total revenue might get some boost from better tax revenue and compared to last year, there is a renewed hope for better divestment revenues. All of these are hypothetical at the moment.
The Budget reveals two interesting aspects of the political economy of policy formulation. First, it shows how important it is not to have ‘one nation one elections’, as all the States that are going for elections this year get enhanced outlays. Hence, States would be starved of this one-time bonanza if there is a simultaneous election. Second, the reaction of stock markets shows how important it is not to have disruptive unexpected ‘strikes’ on the economy. The stock market which was expecting some shocks reacted positively and looks relieved from the fear of ad hoc policy thrusts. But is this incrementalism enough to lift the economy? Perhaps it might just fall short.
M. Suresh Babu is Professor of Economics at IIT Madras. The views expressed are personal
