3rd February, 2021
The Union Budget is both pragmatic and prospective, considering the backdrop of the negative GDP growth and pessimism surrounding its revival. The Finance Minister keeps growth at the centre stage of fiscal policy, with a strong counter cyclical twist. The FM utilises the fiscal space to a greater extent, raising the deficit target for 2020-21 at 9.5 % of GDP, up from the Budget Estimate of 3.5% in February 2020, and at 6.8% for the fiscal 2021-22. The nominal GDP is forecasted to grow at 14.4% during 2021-22. The growth focus is derived from higher allocation for capital expenditures, at Rs 5.54 lakh crore out of the total expenditure of Rs 34.83 lakh crore during 2021-22, majorly in the form of infrastructure development. Thus, the aggregate demand is mostly expected to be generated from the public investments in infrastructure, across a wide variety of sectors, including much higher agriculture and fishery, including health, environment and energy sectors, and not so much from the consumption side, as there is no relief in personal taxation front.
Government borrowing has been kept at Rs 12 lakh crore for 2021-22, and an additional Rs 80,000 crore during the remaining two months of this fiscal. India borrows primarily from the domestic market in local currency; therefore debt sustainability issues are not an issue. The debt mathematic is also comfortable, with the nominal GDP growth rate remaining higher than the weighted average borrowing rate for the Government. At this point, India should approach overseas market for the long awaited sovereign bond issuance; benefitting from the lower interest rate, and this would not crowd out private investments locally.
When borrowing is for the capital expenditure and for generating productive purposes, the inflationary consequences will also be minimal. Also, from a macro perspective one expects the inflationary pressures to be moderate, given the accommodative stance of the monetary policy and the unconventional actions to ensure its better transmission by the Reserve Bank of India. There was no adverse reaction from the bond market following the Budget announcements, the 10-year benchmark rose marginally higher by about 15 basis points, despite significant higher borrowing targets. Disinvestments and asset monetization are well planned move for additional resource raising for capital investments. The disinvestment target at Rs 1.75 lakh crore for the fiscal 2021-22 is optimistic though, which relies on the current buoyancy of the equity market.
Equity market has cheered up with biggest ever budget day gain of 647 points in NIFTY, and this came primarily from three reasons: First, market considered the continuity in the tax and investment regime as positive news, and continuing with more simplification of procedures and better compliance. Second, there were no negative news such as the expectation that the Government with revenue constraints might go for a wealth tax, or a higher capital gains tax or a surcharge. Third, the underlying growth orientation in the Budget itself boosted earnings prospects. The rally in the market was also due to the big news for the public sector banks, with Rs 20 thousand crore additional capitalization and the proposal for the Asset Reconstruction Companies (ARCs) that will buy up distressed assets out of their books.
The Budget strengthens the agenda of Atmanirbhar Bharat with selective protectionist measures such as hike in custom duty to protect the textile industry, and the same time strategically opening up of the insurance sector and FDI in select infrastructure. Corporate India benefits significantly with the Production Linked Incentive scheme (PLI) applicable to 13 sectors, the allocation budgeted at Rs. 1.97 lakh crore over the next 5 years, to incentivise incremental production, and this has to be seen along with measures so far such as lower corporate tax rate and measures that ease of doing business. Reforms takes precedence this time with FDI insurance sector upto 74%, the proposal for the privatization of two public sector banks and one general insurance company, and the restructuring of the bad debts of the public sector banks, as good measures for the revival of the investment climate. Taking out bad debts from the books of the public sector banks and handing over to the ARCs is a bold step, this will relieve the banks from provisioning for non-performing assets.