India has hailed the 2021-22 Budget. The stock market greeted it with more than 3,000 points rise in benchmark BSE Sensex in two post-budget trading sessions – something Indian bourses did not witness in years. The industry seems optimistic about the proposed big hikes in capital expenditure overlooking the escalating fiscal deficit. The Union Finance Minister Nirmala Sitharaman has opened up the banking and the insurance sector further to foreign investment and has declared to privatise loss-making public sector undertakings which continue to bleed the precious public resources.
It is a daunting task to bring the demand back to the pre-Covid-19 levels. But while presenting the Budget, FM has stated that ‘this moment in history, when the political, economic, and strategic relations in the post-Covid world are changing, is the dawn of a new era – one in which India is well-poised to truly be the land of promise and hope.”
The FM has laid out India's path to economic recovery by boosting healthcare, giving infrastructure a big push and extending support to the agriculture sector in her Budget. The Covid-19 pandemic has led to massive economic disruptions worldwide. India’s GDP has reduced from `71.19 lakh crore in the first half of last year to `60.03 lakh crore in the current year.
The budget deficit is projected to increase to 9.5%t of GDP in the 2020-2021 fiscal, up from 3.8% in the previous fiscal year and well above the government's budget estimates of 3.5%. This would be the largest budget deficit on record, as the Covid-19 pandemic severely affected the government revenues while exerting pressure to increase public expenditure. At the same time, the real GDP growth is seen contracting by 7.7% in 2020-21 as against a growth of 4.2% in the previous year.
as % of GDP
Source: Union Budge
And now in 2021-22 Budget FM has risked a higher fiscal deficit of 6.8% of GDP to pump in more funds in the economy in a bid to revive economic activities. The government is committed to an all-round development and making India self-reliant, the FM has declared. The coronavirus outbreak came as an opportunity for India to emerge as 'the land of new hope'. If the budget now gives FM the chance to articulate the government’s revival programme, Atmanirbhar Bharat and Pradhan Mantri Yojana introduced earlier to fight the backlash of lockdown were mini-budgets in themselves. Covid-19 support measures accounted for 13% of GDP, while measures by the government and RBI amounted to another `27.1 lakh crore, the minister said.
In fact, FM’s earlier measures are bearing fruits. Most of the economic indicators, be it GST collections, industrial output, electricity consumption or external trade – all have shown an upward trend. Most of the international rating agencies too have upped their projections on India’s GDP growth for 2021-22.
Emboldened, FM herself has projected 11% GDP growth next year in her budget speech. Days later, the central bank in its monetary policy has seconded FM’s projection with a 10.5% GDP growth forecast.
FM baits on infra development to push up growth
The government had a big policy dilemma as to how to restore the economy. Should Sitharaman go for measures to inflate consumption demand, as a number of economists were suggesting, or follow the conventional economic premise of growth that would generate income?
The FM chose the second one and decided to invest in infrastructure to push up growth. Higher investment would generate more jobs and in turn, increase income that would automatically inflate consumption expenditure. She chose the infrastructure sector as the growth driver because it would not only create more jobs, both skilled and unskilled, but would also help other sectors such as steel, cement and electricity to grow.
The infrastructure sector as a result got a sharp increase in outlay. The FM has also proposed measures which will boost financing to the capital-intensive sector as the fund-crunched government would not be able to meet the demand of the sector. In fact, infrastructure is taken as one of the six pillars on which the Budget 2021-22 is built on. Accordingly, the capital outlay of the sector increased to a huge `5.54 crore in 2021-22 Budget – up by 34.5% from the budget allocation of the previous year.
Centre's capital expenditure
Source: Union Budget 2021-22
Choosing infrastructure as the growth driver was, however, not a sudden choice. Amidst severe fund scarcity the government had in fact, raised the capital expenditure for FY 2021 too – it was raised to `4.39 lakh crore in the revised estimates as against the budget estimates of `4.12 lakh crore.
But the biggest boost to the sector came from the finance minister’s announcement to set up a development financial institution (DFI) for infrastructure projects, which has been on top of the wish list of the cash-strapped industry. FM has provided `20,000 crore to capitalise this institution that would aim to have a lending portfolio of at least `5 lakh crore in three years.
A development finance institution is an agency that finances infrastructure projects that are of national importance but may not always conform to commercial return standards. In most cases, these agencies are government owned and their borrowings enjoy the comfort of government guarantees, which help bring down the cost of funding.
According to the FM, “Infrastructure needs long-term debt financing. A professionally managed development financial institution is necessary to act as a provider, enabler and catalyst for infrastructure financing.”
At the other end, to facilitate FDI inflow to the sector, FM has proposed to relax some of the conditions relating to prohibition on private funding, restriction on commercial activities and direct investment in infrastructure.
Health sector gets a big boost
If FM chose the infrastructure industry to bring back the economy to revival path, the experience of Covid-19 related commotion in the country’s healthcare sector led her to give the sector a special care. And the healthcare sector gets a priority treatment in the 2021-22 Budget. The deplorable condition of the country’s health system was exposed as more and more Covid patients were denied proper treatment last year. The healthcare sector and capacities for better health management had to be brought in the light of what the country had gone through last year.
To begin with, a new centrally sponsored scheme - PM Atma Nirbhar Swasth Bharat Yojana - is proposed in the budget with an outlay of about `64,180 crore over the next six years. This will develop capacities of primary, secondary, and tertiary care health systems, strengthen existing national institutions, and create new institutions to cater to detection and cure of new and emerging diseases. The government has also set aside `35,000 crore for Covid-19 vaccines in FY22.
What is significant is that the government has extended the scope and sphere of the health system beyond just medical facilities. Termed as ‘health and wellbeing’, the scheme includes nutrition, sanitation, supply of portable water and clean air.
Such a grand scheme needs huge funds and FM has tried to provide as much as she could in a trying condition. She has allocated `2,23,846 crore for ‘health and wellbeing’, the second pillar of the Budget as against `94, 452 crore allocated in the previous Budget – up by 137%.
Agriculture’s allocation declines
Interestingly, while FM chose infrastructure and related industries to revive growth, she has almost neglected agriculture, the sector that grew despite an all-round economic deceleration. Commenting on the budget Prime Minister said that farmers and villages are at the ‘heart of this year’s Budget’, but figures do not support the claim.
FM allocated `1,48,301 crore for agriculture and allied activities in 2021-22 Budget. This is 4.2% less than `1,54,775 crore allocated last year. Further, this allocation is only marginally higher (by 2%) than the expenditure made in the year 2020-21 which is `1,45,355 crore. It is worth mentioning that while in 2020-21 the allocation made to the ministry accounted for merely 5% of the central government’s budget, even this amount was not entirely spent and the spending was lower than the amount allocated by `9,420 crore. The drop in allocations is reflected in the estimates of the major agricultural schemes of the government.
Expenditure on major agricultural schemes (Rs crore)
PM Fasal Bima
PM Krishi Sinchayee
Intt Subsidy Scheme
PM Kisan Samman Nidhi
Source: Union Budget 2021-22
To compensate for the decline in allocation, the FM has extended the scope of farm credit. She has proposed a 10% hike in the farm loan disbursal target to reach 16.5 lakh crore and has introduced an agri-infra and development cess of up to 100% to create post-harvest infrastructure for improving farmers' income. In a slew of steps to support the agriculture sector, the FM announced nine measures for the agriculture sector.
Agriculture has the potential to generate incomes and livelihoods, which help in the recovery process. Rural employment generation is of critical significance at the current moment. Food and fertilizer subsidies have gone up though. However, these do not directly contribute to employment and income generation.
For that matter, the FM has not only lowered the allocation of agriculture but has also allocated in rural employment scheme, MGNREGS, a lower amount in the 2021-22 Budget as compared to the revised spending in 2020-21. The budget allocation at `73,000 crore in MGNREGS was nearly 34% lower as against `1,11,500 crore in the revised estimates for 2020-21. This is feared to have a serious negative impact on the rural economy.
Education faces a 6.13% cut in allocation
Like agriculture, the FM kept the country's education too waiting for better days. FM has slashed allocation for education by about 6% - even as it announced the development of 15,000 ‘Adarsh Vidyalayas’ (model schools), a new central university in Leh, a 'glue grant' for better synergy among institutions and a single higher education regulator in the budget for 2021-22. The allocation for the education ministry has been cut to `93,223 crore from `99,311 crore, as per the budgetary proposals. However, there is a consolation point that when compared to the revised estimate of 2020-21, there was a 9.5% increase in this year’s allocation.
Allocation on education
Source: Union Budget 2021-22
Notably, the allocation of education is cut at a time when the Covid-19 pandemic has introduced an unprecedented change to the education system and some of these are permanent as well. For instance, distance or remote learning gained momentum and it is predicted that even if education institutions reopen, a blended learning format would continue to be part of the new normal.
Stock market goes overboard
But if the allocation on agriculture or education did not meet expectations, the stock market couldn’t care less and greeted the FM’s budget proposals with a huge rise in stock prices. The benchmark BSE 30-share S&P Sensex and Nifty closed at 5% higher on February 1. Sensex closed 2,314 points higher at 48,600 and NSE Nifty 50 index gained 646 points to 14,281. This was a historical jump seen on Budget day, with Sensex and Nifty rising over 5% each.
The basic thrust of the Budget was raising capital expenditure and infra-led growth which is positive for a number of sectors including cement, heavy industries, insurance, PSUs and private sector banks who came out as prominent beneficiaries.
The banking sector turned out as the major driver of market growth following the FM’s announcement that the government would set up an asset reconstruction company to take over toxic assets. Reflecting the trend, bank Nifty rose 2,484 points intra-day while BSE bankex surged 2,544 points.
Interestingly, Indian bourses had turned buoyant without any direct benefits coming to it except the proposal to simplify dividend tax payment. Maybe, keeping the tax structure unchanged kindled a positive vibe in bourses.
The FM’s decision to keep the tax structure unchanged has given a sense of stability in the market. The fear of Covid tax on the rich was doing rounds but has not happened. At the other end, by not imposing any extra burden on Corporate India, FM has allowed the companies to keep the gains they made amidst lockdown. A survey by Dalal Street Journal shows that the cumulative net profit of 3,146 listed companies went up nearly two and half times year-on-year basis in the second quarter of 2020-21. The surprise upside on earnings came despite a continued contraction in sales volumes and revenues.
The premise that infrastructure growth would help revive the economy is tested economic wisdom. However, building infrastructure and experiencing its multiplier effect on the economy is a long-term process. The FM’s stress on infrastructure investment will bear fruits in the long term but there is uncertainty about its short-term outcome. The stake is enormous because the FM is choosing infrastructure as the driver of growth at the risk of ballooning fiscal deficit.