Finance Minister Nirmala Sitharaman on Monday will present the Union Budget for 2021-’22. While speaking at a virtual event of the Confederation of Indian Industry last month, Sitharaman had asked for inputs to formulate a Budget “like never before”. This was significant as it came in the year of the coronavirus pandemic and an unprecedented lockdown, as well as when the economy plunged to brand-new lows.

The pandemic added to existing woes as India’s economy was already slowing down before it struck. The year has left Sitharaman with the task of having to increase government spending in order to boost the economy, but with little scope for higher revenue collection or borrowing from the market.

As things stand

The Economic Survey for the financial year 2020-’21 tabled in the Parliament on Friday predicted that India’s Gross Domestic Product growth rate will contract by 7.7% in this fiscal (2020-’21). It projected an 11% growth in 2021-’22, in what the Survey called a “V-shaped recovery”.

If the actual GDP figures for this year indeed come at -7.7%, it will mark the sharpest annual decline in the country’s economy since Independence. Growth rate projections, however, saw positive revisions in the second half of the fiscal.

On the other hand, if the next financial year indeed witnesses an 11% growth, it might not be as good as it sounds. In terms of plain math, next year’s figures will come on a lowest-ever base, due to this year’s poor numbers. At a more organic level, the narrative of a “V-shaped recovery” itself can be subject to debate.

Expansionary Budget in the offing

The Economic Survey, which serves as a good indicator of the mood of the Union Budget, made one thing clear – the government was willing to spend more to provide impetus to the economy. “In order to sustain the recovery in aggregate demand, the government may have to continue with an expansionary fiscal stance,” the survey said.

In fact, in an interview last month, the finance minister herself said that there was a “clear need to spend money” without worrying about the fiscal deficit. The Narendra Modi government, which walked a tightrope of fiscal prudence in its first five years, had overshot its fiscal deficit target in 2019-’20 itself. In the current financial year, fiscal deficit is expected to come at over 7% of the GDP, more than double the Budget estimate. For the next year (2021-’22), experts polled by Bloomberg said the government is likely to keep the target at 5.5% of the GDP.

The crunch

The finance minister might not choose to worry about fiscal deficit, but she is faced with having to spend more without having too many reserves to tap into.

To start with, the Economic Survey showed that during April-November last year, the government’s income through gross tax revenues fell 12.6% on a year-on-year basis. Further, in the current fiscal, the government fell way short of its disinvestment target of Rs 2.1 lakh crore. As little as Rs 15,220 crore came through this route, as plans of stake sales in Life Insurance Corporation of India, Bharat Petroleum and Air India did not materialise.

The drying up of these resources leaves Sitharaman with the option of borrowing from the markets.

In the Economic Survey, Chief Economic Advisor Krishnamurthy Subramanian quoted Nobel laureate Rabindranath Tagore and advised the government to borrow with a “mind without fear”. He called to ignore the “noisy, opaque and biased” view ratings agencies keep of India’ fundamentals and held that debt sustainability was not a problem for the country due to its “growth potential”.

However, it remains to be seen if the finance minister will opt to do this, given that the Centre borrowed a record Rs 13.1 lakh crore – nearly 70% more than the Budget estimate of Rs 7.8 lakh crore – this year. The additional borrowing will push India’s debt-to-GDP ratio to a worrying level of 85%, according to Bloomberg.

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Where could the money come from?

Despite the potential red flags, the government is likely to borrow a sizeable amount, of around Rs 10.6 lakh crore, according to analysts surveyed by Bloomberg. Besides, the government is expected to once again push forward with its disinvestment plans. As investors begin to loosen their purse strings in the post-pandemic world, the government will hope to close the LIC, BPCL and Air India deals, while also putting on sale stakes in Central Bank of India, IDBI Bank and Punjab & Sind Bank. Together, the plan is to raise Rs 2.5 lakh crore to Rs 3 lakh crore in the next financial year, Reuters reported, quoting government officials, who spoke on conditions of anonymity.

Another possible source of income could be a hike of 5%-10% import duty on more than 50 items, including smartphones, electronic components and appliances, Reuters reported. The move, will be in line with the government’s self-reliance pitch of “Atmanirbhar Bharat”, according to Bloomberg.

What to expect

Less than a quarter (24%) of the government’s budgeted expenditure was earmarked for discretionary spending in the current financial year. Despite the government’s intentions of providing stimulus or incentives to various sections, this share is likely to shrink further as interests on debts, which currently account for 23% of the expenses, are set to rise due to higher borrowing.

However, an expansionary Union Budget almost always translates to higher capital expenditure. Such moves also help the government to generate jobs, as a boost to capital expenditure results in labour-intensive projects. Keeping on these lines, Sitharaman is expected to set up finance institutions, with a sizeable initial corpus for building roads and other infrastructure.

In a Budget that comes in the backdrop of the coronavirus pandemic, the expenditure on health is expected to double from the current 1% of the GDP and is likely to be raised to 4% of the GDP by 2025, according to Reuters. Experts of Kotak Economic Research also made similar predictions, while speaking to Bloomberg. Multiple reports suggested that the government is also deliberating a “coronavirus cess” on high-income earners and some indirect taxes, to fund the health budget.

As for the salaried class, the government is unlikely to announce a relief in the existing income tax slabs, given the deficit in revenues it is already coping with. However, in a push to the new optional income tax regime that was introduced in the last Budget, the government is likely to incentivise the system, according to The Indian Express.

The new regime, which provides for lower tax rates, but at the cost of foregoing various deductions and exemptions, is now expected to allow some more categories of savings instruments, like the provident fund. By doing this, the government will aim to put money in the hands of the salaried taxpayer, in an indirect manner.


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