The Budget, at its simplest, is the government’s tentative income and expenditure statement. Like all financial statements, the devil lies in the fine print.
At its broadest, the Budget is a pious statement of the government’s policy and ideological intentions.
It is also the government’s statement of how it seeks to tackle the immediate political (electoral) and economic challenges.
India’s meagre response
Domestic output or GDP, net of inflation, is expected to decline by 7.7% in the current financial year (FY 2020-21), compared to the previous year (FY2019-20).
The decline in per capita income is by 8.7%.
Unlike most advanced countries and emerging market economies, India’s response to address the distress of the masses has been meagre.
The government’s additional public spending to cope with the unprecedented crisis has been a little over 1% of GDP.
Capital expenditure proposal
Given the context, the present Budget’s focus on stepping up public investment by 34.5% in the coming fiscal year (compared to the current year) is a welcome sign.
The Finance Minister’s speech said the government will borrow an additional Rs. 80,000 crore for the purpose in the next two months.
The estimated fiscal deficit for FY2021-22 is 6.8% of GDP for the central government. And States are allowed a higher fiscal deficit, if the expenditure is on capital investment.
Analysis:
These figures certainly look impressive. Realisation of these investments would crucially depend on tax revenue realisations, disinvestment proceeds, sale of rail and road assets and the government’s ability to raise resources from the market, without raising interest rates for the private sector.
There is no mention of the government’s recourse to debt monetisation. While the investment intentions are evident, its financing efforts seem to have too many loose ends.
The proposed Development Finance Institution (DFI) is also welcome. One of the reasons for poor industrial and infrastructure investment during the last decade was a lack of long-term credit for infrastructure, which by definition yields low rates of return spread over a long period of time.
Commercial banks, whose deposits are for short to medium term, find it difficult to lend for long term (more than five years) for the fear of maturity mismatch.
Health and employment
If the announcement made represents a substantial annual fixed investment in improving urban sanitation, drinking water and sewage facilities, it is indeed a welcome step.
There are lessons to be learnt from rural Swachh Bharat Abhiyan, however.
The Budget has very little to say about employment.
Surely, the proposed step-up in infrastructure would create labour demand. It bears repetition that the 2010s were a decade of job loss growth, as in official National Sample survey estimates.
The pandemic has rubbed salt into the country’s wound, leading to the migration crisis, which is still with us (as the report cited above shows).
Unfortunately, there is very little acknowledgement and response to the crisis in the Budget.
Inequality glossed over
While the poor lost their jobs and livelihoods in 2020, corporate India’s profits zoomed.
The rank of the richest Indian has moved up to the 11th spot on the Bloomberg Billionaire Index.
Conclusion:
In summary, if the capital expenditure plan outlined in the Budget speech is credible, and implemented with assured financial backing, it could revive the investment cycle.
The proposed development bank for term lending for infrastructure is welcome, provided its sources of finance are cheap, long term and mostly domestic.
Investments in urban public health infrastructure — sanitation, water supply and sewage — are in the right direction if implemented in a coordinated manner.
That there is no targeted employment programme to alleviate the immediate crisis is a matter of concern.
Government apathy towards those who lost jobs and livelihoods due to the health and economic shocks last year seems galling.
