No room for extravagance in 2021-22 budget

Despite the hoopla around this year’s annual budget, it is unlikely to be a stunning display of “clever accounting” catering to all whilst pleasing none. Nor is it likely to strew goodies all around.

Challenges abound

The need is to spell out hard fiscal decisions. The list of challenges is long. The interest burden consumes nearly one-fourth of the spend, tax revenues have been savaged by low output in industries and “high touch” services, continuing low investment, public sector banks sliding into the post C-19 backwash of bankruptcies, masked as loan restructuring, demand constrained by increased industrial and informal sector joblessness or redundancies masked as “leave without pay”. 

And two known unknowns

The biggest unknown is the course of the C- 19 virus. Are we staring at a slow decline in infections and morbidity, post the launch, this Saturday, of the vaccination campaign? Or will the pathogen mutate quickly stretching out the uncomfortable uncertainty of contagion from social contact, into 2023? 

The difference between the two scenarios is significant. The direct cost alone is Rs 1 trillion for 500 million free vaccine shots in the benign scenario where the virus does not hit back. This incremental spend increases the health budget by 38% over the combined spend of Rs 2.6 trillion on health in 2019-20 by both the Union and the state governments.

The second unknown is China. Is it done with showing up our frailties? Or are we going to continue to be the “fall guys” for it to demonstrate to the world that it has arrived and its time to pay tribute?

Defence calls

The combined spend of the Union and state governments on defence and police (2019-20) was around Rs 5.8 trillion of which defence has a 54% share. 

India’s strategic ambition runs ahead of domestic economic capacity. If we are serious about sailing with the big boys in the Quad, we need to up our tech capacity in the Navy, Airforce, Space warfare and smart, robotic terrestrial applications. All this needs investment, reorganizing commands and force compositions away from boots to hardware. 

Budgeting anything less than 3.5% of our estimated GDP of Rs 200 trillion (Rs 6.5 trillion in 2021-22) is inconsistent with our context and our stated strategic objectives. Most countries in deeply contested environments- think the Middle East- or those with economies relatively much smaller than their population or land mass- think Africa- or others, like Russia, who wallow in their past splendor, spend a similar share of their GDP on defence. 

Our context – with deeply embedded, inherited border confrontations, does not permit the luxury of saving on defence to spend on development, as China did. Nor does a “low key” stance align with the preferred “strongly, self-sufficient” strategic mien of the Modi government.  

More importantly, increasing our broad-banded domestic and national security outlay by Rs 0.7 trillion at a time of severe fiscal stress globally, is the perfect opportunity to showcase that the expansive strategic outreach is not just talk. 

The crib sheet for budget 2020-21

How then must the FM manage these challenges on February 1, 2021 as she presents next year’s budget?

First, bridle fiscal ambition to a fiscal deficit no more than 7% of GDP to signal that India remains a fiscally stable player (Arun Jaitley’s signature commitment in 2014) with a long game which does not envisage 6% plus inflation – the business economists favored but highly destabilizing tool to boost stock markets and deflate the real cost of investment. 

Inflation management is best fought with a prudent fiscal policy not through the blunt monetary policy of the RBI which remains hamstrung in passing through the lowered base interest rates to customers, due to the low efficiency and high cost of credit in state owned banks.

Second, the burgeoning NPAs of government owned banks (12.5% of assets) should be tackled head on- not brushed under the carpet. Concrete steps to reduce the margin of lending to no more than 1.5 to 2% can make debt affordable at low interest rates and kick- start investment. An outlay of Rs 2 trillion over the next two years for capitalization of past losses will encourage NPA recognition and resolution. 

Third, continue the good expenditure management work done thus far this year in shrinking low priority expenditure outlays for central ministries. The attendant disruption in assured transfer of central grants and devolution of tax revenues to state governments needs to be reversed and fiscal credibility restored. 

Fourth, despite the fiscal stress due to an -at best- stagnant economy, an incremental Rs 2.7 trillion must be found – Rs 1 trillion each for bank recapitalization and free vaccine shots and Rs 0.7 trillion for incremental defence spending. 

Fifth, moderation of the IT and Telecom outlays to the 2018-19/2019-20 level of Rs 0.15 trillion from an expansionist budget outlay of Rs 0.6 trillion in 2020-21, saves Rs 0.4 trillion. The railways must look inwards to become “self-sufficient” and live with zero budget support next year saving Rs 0.6 trillion. Similarly spend on energy (Rs 0.46 trillion 2019-20) can be significantly curtailed.  Rationalizing spend on agriculture by merging the fertilizer subsidy into the PM Kisan Samman Nidhi saves Rs 0.7 trillion. Targeting it to only the small farmer allows increase in the outlay per farmer.

Sixth, the big “hole” this year, has been the unfulfilled disinvestment target of Rs 2.1 trillion. With stock markets booming, accelerated disinvestment of government shares in blue chip PSUs, banks and financial institutions though the sale of equity route, should target a “never before” Rs 4 trillion in 2021-22. 

It is all up to just four ministries – Railways, Agriculture, IT and Telecom and Power to spare the resources needed for domestic and national security, the “free vaccine” program and public bank recapitalization and for the Ministry of Finance, Department of Disinvestment to do two year’s work in one.

Smart strategic focus is all we can afford in this budget. Once the economy revives, there will be enough money and time, for political “pork” and extravagances. But not next year.

Extracted from TOI Blogs January 15, 2021

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