The FM has put forward a convincing roadmap to accelerate recovery through high public expenditure
A once-in-a-lifetime pandemic crisis, the unprecedented tumult in global geopolitics, a bitterly fought US Presidential election, tepid domestic growth – all this and more was the ominous setting for the presentation of the Union Budget 2021 in India.
The novel Coronavirus pandemic brought to the fore radical and drastic measures to safeguard human lives in the form of a complete nation-wide lockdown imposed since March 23, 2020. Almost immediately, words such as ‘lockdown’, ‘unlock’, ‘protective mask’, ‘shield’, ‘quarantine’, ‘flatten the curve’ and many more had entered our lexicon for the first time. Hence, the overall expenditure policy of 2020-21 which was initially budgeted and aimed at supporting the vulnerable sections, was eventually re-oriented to boost overall demand and capital spending once the lockdown was eased in quarters 2 and 3 thereof onwards.
The government has come up with a roadmap for Atmanirbhar Bharat through six pillars to kick start the economy by creating demand through novel infrastructure projects announced and funded by it or by public-private partnerships. For job creation and increasing consumption, the maximum emphasis has been given to infrastructure projects in the roads and highway sectors. The government has also decided to spend big on bridges, ports, power generators, and setting up medical facilities that have testing labs, virology institutes, Biosafety Level III laboratories, and health emergencies centres.
The Budget also provided for the highest capex growth of 34.4 per cent. And the budget also plans to spend a staggering Rs 11.7 lakh crore in a mere three months till March, a record of sorts that takes total spending to Rs 34.5 lakh crore in 2021. The Fiscal deficit has been pegged at 9.5 per cent of GDP for the year 2021 and 6.8% for the year 2022.
So now the moot question is where will the FM raise money for these massive spending projects and targets?
Borrowing
Most of this fiscal expansion will be funded by borrowing. The borrowing next year will be even higher than the 2009-10 fiscal stimulus, which was 6.4 per cent of the annual GDP.
Heavy borrowing for two years will compel the government to pay steep interest payments till debt maturity.
Disinvestment and Public-Private Partnerships
The FM plans to raise Rs 1.75 lakh crore by selling state assets including an IPO of the Life Insurance Corp. of India, offering 10 per cent to the public.
The proposals to privatise two PSBs and one general insurance company are noteworthy as is the increase in FDI limit in insurance to 74 per cent.
Public-private partnership has been proposed in railways.
A professionally managed Development Financial Institution has been created to promote private sector participation, particularly infrastructure financing in sectors such as airports, ports, railways, power, and warehousing assets. A National Infrastructure Pipeline (NIP) has been created for monetisation of brownfield assets to create new infrastructure.
Disinvestment is on the cards for key PSUs i.e. BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, Bharat Earthmovers Limited, Pawan Hans, and Neelanchal Ispat Nigam Ltd.
The move to set up Infrastructure Investment Trusts (InvITs) to attract investment from global funds in highway and power sectors is a step in the right direction.
Asset Monetisation
Assets Monetisation has been proposed in NHAI, Power Grid Corporation, Railway freight corridors, AAI Airports, Oil and Gas pipelines of PSUs etc.
The initiative to monetise surplus land holdings has also been announced. The monetisation of railway land near the New Delhi Railway Station is one such initiative that will pave the way for future land development projects.
Taxes
Although there is no increase in income tax rates, dispute resolution measures such as the Vivaad Se Vishwas scheme and Dispute Resolution Committee will contribute to the higher collection.
GST revenue is expected to grow 23 per cent in 2022, and its current growth trajectory could be the reason for this ambitious target. Fuel cess will increase excise revenues.
To sum it all up, the FM has put forward a convincing road map to accelerate recovery from the Covid-19 pandemic, through high public expenditure, particularly in the infrastructure sector, the FM has walked a fine line in deciding to mobilise revenue through disinvestment and asset monetisation rather than an increase in taxes. Although some might say that disinvestment in key PSUs such as LIC is equivalent to the government selling the family silver, I believe it is a step in the right direction as the multiplier effect of this capex will create direct and indirect employment and enable a rejuvenation of the economy.
The author is a Partner at Bhuta Shah & Co
DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.