The FM wants to boost growth, but it will be at the cost of fiscal de-stabilisation. One is not sure whether a sustained, rapid surge will come as a huge resource gap remains
Taking a cue from the prescription that the Chief Economic Advisor (CEA), Krishnamurthy Subramanian gave in the Economic Survey: 2020-21 that “the Government should come up with more fiscal measures for short-term support to the economy and businesses”, Finance Minister (FM) Nirmala Sitharaman has gone ahead with some “big bang” measures. She has not just attempted to give a boost to industries and businesses in the short-term but has also given an indication of her intent to put them on a high growth trajectory in the medium to long-term.
Apart from giving a boost to the healthcare infrastructure (Rs 64,180 crore allocated for new health schemes besides Rs 35,000 crore for the Covid vaccine) and education, this push is manifested in big plans in the field of infrastructure such as roads, highways, railways, ports, gas pipelines and so on; production-linked incentive schemes (PLI) for 13 sectors; launch of seven Mega Textile Investment Parks over the next three years and measures to give a boost to start-ups and so on.
Sitharaman has tried to demonstrate that the Government is really serious about pumping more money into the economy. Hence, the Budget has provided for capital expenditure of Rs 5,54,000 crore during 2021-22 which is an increase of 35 per cent over the Budget Estimate (BE) for 2020-21 at Rs 4,12,000 crore. Unfortunately, even at this level, it is minimal when compared to the mammoth requirement of over Rs 100 lakh crore over five years or Rs 20 lakh crore per annum under the National Infrastructure Pipeline (NIP) project.
For garnering resources, the FM has outlined a detailed blueprint for asset monetisation — both greenfield projects as well as brownfield ones — covering almost every infrastructure sector one could think of like roads, highways, railways, ports, power transmission lines, gas pipelines and so on. She has also mooted setting up of a new Development Financial Institution (DFI) termed the National Bank for Financing Infrastructure and Development (NaBFID) Bill, 2021.
This is intended as a provider, enabler and catalyst for infrastructure financing and as the main financial institution and development bank for building and sustaining a supportive ecosystem across the life cycle of infrastructure projects. The Government will infuse Rs 20,000 crore in NaBFID as budgetary support which will be leveraged to generate a financing capability of over Rs 5,00,000 crore.
Given the cumbersome processes involved in undertaking sale of State assets as also lack of market appetite, it is unlikely that these would materialise soon. As regards raising resources via setting up of a DFI, the idea — abandoned decades ago (then, we had IDBI and ICICI as institutions involved in long-term lending) — is a welcome move, all the more because it is free from the kind of asset-liability mismatch which banks suffer from. But it will take long before the NaBFID will be able to contribute in a meaningful way.
In the Economic Survey, the CEA has asked the Government to remain focused on propelling growth even if it means the Fiscal Deficit (FD) getting out of control. The irony is that during 2020-21, despite the Gross Domestic Product (GDP) contracting by 7.7 per cent, the FD has spiraled to a whopping 9.5 per cent of the GDP. This is almost three times the Budget estimate of 3.5 per cent, which itself was 0.5 per cent higher than the three per cent threshold required as per Fiscal Responsibility and Budget Management (FRBM) and justified by Sitharaman in terms of the “far-reaching structural reforms with unanticipated fiscal implications.”
At 9.5 per cent, FD is even higher than a widely expected figure of around 7.5 per cent. This is largely because the Government has taken on its balance sheet the so-called off-Budget liabilities or loans taken by State agencies (on its behalf) including from the Food Corporation of India (FCI). Since 2016-17, the FCI has been borrowing from the National Small Savings Fund (NSSF) to finance unpaid food subsidy dues from the Centre.
As on March 31, 2020, its cumulative borrowings from the NSSF stood at Rs 3,30,000 crore. All of this, plus the loans taken during 2020-21get transferred to the Centre’s balance sheet. For the future also, the FCI will not have to borrow from the NSSF.
The FD for 2021-22 is put at 6.8 per cent of the GDP. Considering that the nominal growth of the GDP is projected to rebound to over 15 per cent and correspondingly the tax revenue — both direct and indirect — will also increase sharply, this figure seems to be pretty high. With this, the FM has also drastically altered the trajectory of fiscal consolidation by targeting a FD of 4.5 per cent during 2025-26. Compare this with 2.5 per cent for 2022-23 as recommended by the NK Singh Committee on review of the FRBM. To legitimise this fiscal splurge, the Government will have to make further amendments to the FRBM Act (it was last done through the Finance Bill 2018-19 prescribing a FD target for 2020-21 as three per cent plus 0.5 per cent for unanticipated events).
The announcement of a policy on divestment of the Government’s shareholding in Central Public Sector Undertakings (CPSUs) that aims at selling all CPSUs in “non-strategic” sectors and restrict its presence in “strategic” sectors to the bare minimum has been in the works for nearly five years. It was started by NITI Aayog who will now have to work on the details. It does not instil confidence as the current approach of linking divestment to the FD target simply won’t work.
Faced with a sharp increase in Non-Performing Assets (NPAs) post-pandemic (according to India Ratings and Research, as proportion of the outstanding debt, NPAs will increase from 11.57 per cent to 18.21 per cent by the end of 2021-22), the Budget has resurrected the idea of “bad bank” recommended in 2018, by a committee headed by the former Chairman, Punjab National Bank, Sunil Mehta. A “bad bank” buys the NPAs of other banks and thereby helps clear their balance sheets. It does not solve the problem but merely transfers the stress from the latter to the former.
The proposed Electricity (Amendment) Bill, 2021, to de-licence the distribution business, bring in competition and give power to the consumer to choose his/her suppliers does not inspire. The Electricity Act (2003) also had provisions to empower consumers but it never worked. Further, the real intent behind the Rs 3,00,000 crore electricity distribution reform programme is to give money to the beleaguered power distribution companies or discoms so that they can clear dues to power generators and other suppliers; it has little to do with improving their efficiency, as stated.
The FM has enumerated all that is being done to help farmers; that includes massive increase in buying by State agencies at the MSP. But, majority of small and marginal farmers (they are 86.2 per cent) don’t benefit from it. Likewise, agricultural credit (now raised to Rs 16.5 lakh crore) is cornered mostly by large farmers i.e. those with farms over 10 hectares.
On the taxation front, the Budget proposes minor changes such as extension of tax holiday for start-ups by one more year; exempts dividend payments to Real Estate Investment Trusts and Infrastructure Investment Trusts from tax deduction at source; deduction of tax on dividend income for Foreign Portfolio Investors at the lower treaty rate and so on.
To conclude, even as the FM wants to go for the kill in terms of reinvigorating growth, she wants to do it at the cost of fiscal de-stabilisation; even then, one is not sure whether the sustained rapid growth will come as a huge resource gap remains.
