Bold and Beautiful but Needed Some Balancing

Union Finance Minister Nirmala Sitharaman presented Union Budget 2021 amid high expectations and speculations. This budget has been prepared under the shadow of COVID-19 crisis, and Economic Survey highlighted several issues which our economy is facing.

The budgetary allocation is directed towards reviving growth and government preferred growth over fiscal prudence. Capital expenditure has been increased by 34 per cent to Rs 5.54 lakh crore, which will give a much-needed push to infrastructure development. Expenditure on the health sector was expected to be increased due to the unprecedented crisis witnessed last year and increased expenditure from Rs 94,452 crore to Rs 2,23,846 crore (up by 137 per cent) be used towards building the health infrastructure.

Agriculture and allied sector still employ more than half of the country workforce. It contributes roughly 18 per cent of the country’s Gross Value Added (GVA) at constant prices. Budgetary allocation on “Agriculture and Allied Activities” has been increased to Rs 3,82,204 crore, an increase of 44 per cent as compared to the previous budget estimate. A large part of this amount has been allocated towards developing agriculture infrastructure in storage and warehousing. FM showcased increased Minimum Support Prices (MSP) outlay to farmers during the NDA regime, and agricultural credit target has been increased by 10 per cent to Rs 16.5 lakh crore in the current budget. Similarly, allocation on rural development has been increased by 18 per cent, which mainly includes expenditure towards rural employment scheme MNREGA. This scheme ensured livelihood of migrant workers during the lockdown and expenses increased significantly in revised estimates for 2020-21. Since workers have started coming back, the current year allocation appears to be reasonable.

Fiscal deficit target is 6.5 per cent for the next fiscal and Finance Minister has assured that nothing is brushed under the carpet. Financial jugglery used earlier to fund food subsidy via loan route has now been taken into the books. Perhaps this could be the reason behind the sharp increase in “Department of Food and Public Distribution” allocation in 2020-21 revised budget estimates. 2020-21 budget estimate of Rs 1,21,078 crore has been increased to Rs 4,37,517 crore in revised estimates. This is a welcome move towards bringing transparency. Estimated non-tax revenue is lower than the previous year, but the sanctity of fiscal deficit target will mostly dependent on the realisation of disinvestment proceeds. Our public sector enterprises are like family’s silver, and if the government wants to do away with this, it should first sell the rusted silver. It doesn’t make any sense to sell profitable PSUs while keep running loss-making ones out of the public exchequer. This kind of privatisation is “Unjust Enrichment in Disguise” where corporates will benefit at the cost of public money. Institutions like LIC have been created over decades, and selling stakes in the name of reform is unwise.

There are not too many tax proposals this year, and some of the amendments are in taxpayers’ interest. Reducing time limit to 3 years for opening income escaping assessments, setting up dispute resolution mechanism, faceless appeal with ITAT etc. are a welcome step. However, Rs 10 lakhs’ monetary limit for eligibility under dispute resolution mechanism should be reconsidered and enhanced because provisions related to settlement commission are proposed to be omitted now

Nevertheless, valuation of PSUs is always a contentious issue despite increased transparency in price discovery mechanism. The stock market may cheer disinvest decisions, but it must be noted that secondary market transactions have no bearing on the economic activity because no capital flows to the business when shares change hands at bourses. Assessing impact of macroeconomic decisions merely by stock market performance would be a great mistake.

Undoubtedly, the government had a tough choice in the current year. It has no other option but to resort to market borrowings. Economic Survey argued that as long as our nominal growth rate is higher than the cost of borrowings, policymakers should not be worried about debt. This theory is useful only when debt is being utilised in asset creation which remains invested and generates a consistent surplus. In our case, this is not the situation because market borrowings are targeted at Rs 12.05 lakh crores while Capex is planned for Rs 5.54 lakh crore. If we add targeted disinvestment proceeds, then overall asset creation will fall short of liabilities assumed by the government. If we add interest payment of Rs. 8.4 lakh crores and Capex creation, then apparently it looks like borrowings are used to meet the interest obligation, which is a legacy issue for this government. Higher fiscal deficit for the current budget is a fact, but the obsession with debt is bad. Mature economies are formal and thereby their ability to quickly raise the resources is better as compared to India. Therefore we should not be comparing our debt-GDP ratio with the west. A higher borrowing is going to increase bond yield, which will raise the cost of borrowings for government and corporates. Economic Survey has dedicated a full chapter on sovereign credit rating, and the higher debt-GDP ratio is certainly not going to improve our ratings. Sovereign ratings are not just a linear factor of willingness and ability to pay because many variables with varying weightage determine ability to pay.

FM has stressed on consolidating various fiscal laws, development of the bond market, and FDI limit in the insurance sector has also been increased. Various offences under corporate laws are to be decriminalised, and it’s good to create mutual trust between regulators and businessmen. These are good steps in the right direction—however, budgetary allocation of Rs 20,000 crores towards recapitalisation of banks appears to be less. RBI’s financial stability report released in January 2021 has already indicated a steep increase in NPA from 7.5 per cent in Sep ’20 to 13.5 per cent in Sep ’21 in the baseline scenario and up to 14.8 per cent in a severe stress scenario. Economic survey has also highlighted that the bad loan crisis is yet to be resolved even after the Asset Quality Review (AQR) is over, which was started by Raghuram Rajan. It is important here to highlight that regulatory forbearance by RBI has become a routine, and therefore, it is difficult to rely on the financial health of our banks based on balance sheets. It raises a question mark whether this regulatory forbearance is resulting in window dressing by banks? The economic survey should have highlighted the impact of bank mergers on economic and regulatory of merged banks. To put into perspective, RBI has consistently deferred global accounting practice of recognising NPAs based on Expected Credit Loss (ECL) model, which may also identify off-balance sheet items. It would be interesting to see how Asset Reconstruction Companies (ARC) will help handle all-pervasive NPA mess in the financial sector engulfing banks and NBFCs.

There are not too many tax proposals this year, and some of the amendments are in taxpayers’ interest. Reducing time limit to 3 years for opening income escaping assessments, setting up dispute resolution mechanism, faceless appeal with ITAT etc. are a welcome step. However, Rs 10 lakhs’ monetary limit for eligibility under dispute resolution mechanism should be reconsidered and enhanced because provisions related to settlement commission are proposed to be omitted now. Obsession of taxing provident fund amount should also end because this is the only safe investment for the salaried middle class. Increasing monetary threshold for income tax audit and doing away certification of annual return under GST could be counterproductive towards tax compliance and should be reconsidered. The success of initiatives towards transparent taxation and dispute resolution depends on proper execution. Otherwise, these will have a similar fate like Vivad se Vishwas scheme where assesses are still awaiting tax officials’ response.

Overall, the budgetary allocation is good in view of the pandemic hit the economy, which has just started picking up and the fiscal constraints that the government is facing. Perhaps this is the best budgetary allocation which we have seen in recent past. GST collection, PMI data, credit growth etc. are indicating that economy is back on track. However, the government should have considered giving some relief to the salaried middle class, and Chanakya’s principles of collecting taxes like a honeybee should have been followed.