Despite receipts being 18% lower than even last year till November, largely because of the yawning gap against the aggressive budget estimate for disinvestment receipts (Rs 2,1 trillion), the Union government did well to spend almost 5% more than last year by enhancing borrowing. This is in the best traditions of trying to keep the fiscal flows as normal as possible.
Budgetary ambition is a double edged weapon
Budgetary outlay was pegged, ambitiously, for 2020-21 at Rs 30.4 trillion, despite revenue receipts under performing last year. High budget estimates and low actual receipts feed public perception of fiscal disruption, well beyond the actual additional spend to contain C-19 and the associated relief measures like free food for the poor. But it’s not over till it is over. The next fiscal year (2021-22) will continue to bear the scars of the pandemic, albeit hopefully, with near-normal functioning in its second half.
The two year stand still till
The probable best-case scenario is that by the end of 2021-22, GDP would have recovered in constant terms to the level of 2019-20 – after an extended, economic stand-still of two years.
Even for this to happen, the economy must grow on average by 8.5% across all four quarters. No easy target that. The Finance Minister inherited an economy in decline since 2018-19 (growth 6.1%) which slowed to 4.2% in 2019-20. This year has been all about firefighting with receipts till November 25% below the budgeted receipts of Rs 22.5 trillion.
Despite strategically selected budget allocations the fiscal deficit grew to Rs 10.7 trillion by November against the year-end target of Rs 8 trillion (3.5% of an assumed current GDP of Rs 225 trillion). Using the recent NSO current GDP estimate of Rs 194.8 trillion for 2020-21, a fiscal space of Rs 1 trillion still exists for additional borrowings to finance spend, within the historical “Lakshman Rekha” of 6.6% of GDP set in 2009-10. This fiscal space provides room for factoring in the unanticipated health and social protection costs of C-19 management.
It helps that the BJP is culturally inclined to be fiscally conservative despite its aggressive strategic and political stance. This serves the economy well in these unusual times when there is tremendous peer, public and business pressure to be fiscally profligate.
It will be hard for the FM to avoid succumbing to such parlous options next year. Penny pinchers rarely garner glory, though using the taxpayer’s money the way a cautious businessperson would use their own money, is exactly what the FM needs to do.
So, what options does the FM have?
First, “No New Taxes” would be, pleasing and sensible. Best, to leave money in the hands of taxpayers. With higher revenues next year more resources shall be available to supplement the income or savings of those who have suffered the most.
The fiscal urge is strong to exploit the ideological “cover” of “Atma Nirbharta” (Self Reliance) and raise revenue through higher import taxes. Higher import tax has negative economic consequences for consumer welfare – prices will increase for both imported and domestically manufactured products as will inflation. High import taxes discourage global integration and related trade expansion, leaving us little choice but to tailor monetary and fiscal policy to the inflow of foreign capital to balance the current account. Oil prices are firming and consumption picking up with re-emerging normalcy, which will wipe out the C-19 induced happy situation of a current account surplus.
Second, calls to abolish the capital gains tax, which is starting to bite, now that stock markets have risen for the first time, since it was reinstated in 2018-19 or to enhance the Income Tax free limits are without merit. Those in the lower income brackets who have lost jobs or suffered business loss would not benefit from a tax reduction, whilst for the employed, savings have increased so a tax rebate is unwarranted.
Third, recognizing that the fiscal deficit shall remain elevated at around 7% of GDP this year and the next, enhanced capital expenditure (defence and infrastructure) should progressively substitute revenue expenditure so that the incremental borrowed funds are used productively. Removing the obstacles for private investment in defence and infrastructure is better than spending more directly through PSUs.
Fourth, recapitalizing public sector banks is better than artificially greening their assets through extended forbearance in NPA recognition. Creating new institutions, like an intermediary bank management entity, into which government equity is transferred, is a time-honored device for evading a decision. Best to get on with the drudge of NPA recognition. Empowering hand-picked bank managements, with special dispensations against regulatory harassment – as provided to the government appointed private managers for the ILFS reconstruction- can fast forward the process.
Fifth, the FM must guard against the “capitalphobic” rhetoric sweeping the globe, inspired by the heartrending and inevitably skewed distress, imposed by the pandemic, on the less able or the less well endowed.
The lessons in equity from the pandemic are not ideological in nature. Private investment, global collaboration, markets and light touch, predictable regulation remain the guiding principles for success, as illustrated by the rapid bringing to market of C-19 vaccines.
C-19 might change the world but the principles of efficiency and shared growth still hold
Becoming internationally competitive – not cosseted by tariff protection or government sponsored employment- remain the touchstones for success, think Germany or the United States.
Growth continues to matter. It distinguishes the US from Europe and enables China to challenge it. Sustainable development – safeguarding scarce water resources, reducing the carbon footprint whilst enhancing the digital, automation, AI footprint, protecting biodiversity and promoting the provision of inclusive public services in education, health and municipal facilities like sanitation and drinking water, affordable housing, electricity, gas and telecom remain key sovereign concerns.
Sustained progress on these pillars of growth, within- a plausible, multi-year, fiscal framework promoting innovation, R&D, transparency, the rule of law, social and gender equity, is what budget 2021-22 should target. Sadly, not breaking news. But foundational work, to prepare for the rich pickings available once C-19 become just a bad memory.
Extracted from the authors blog in TOI Blogs January 20, 2021 https://timesofindia.indiatimes.com/blogs/opinion-india/budget-to-infuse-hope-build-resilient-foundations/