India’s Union budget 2021-22 to be presented on February 1 by Finance Minister Nirmala Sitharaman is awaited with mixed expectations. The majority of Indians and economy watchers are expecting the budget to be a “change agent” and carry the best measures to salvage the pandemic-affected economy and lead its revival.
The shrunk economy needs a deft healing touch and a booster shot to rev up, even if it takes some more time to reach pre-Covid levels.
In this connection, one must recall the recent statement of Niti Aayog vice-chairman Rajiv Kumar that the country’s economic growth is expected to touch pre-Covid levels by the end of the 2021-22 FY. In his words, a drastic GDP contraction in the ongoing financial year was averted and restricted to less than 8 per cent thanks to the revival of manufacturing in the third quarter and consumer demand also made a sharp revival.
Reasons for Awaiting Revival from Budget The budget is looked upon as the ultimate tool for revival since monetary easing by the RBI, by way of interest rates cuts, has been inadequate to bail the economy out of the crisis mode. Now with the RBI hinting that no further cut in interest rates will be made until April 2021, there are high expectations from the finance minister’s budgetary intervention in the context of the slowing economy and rising inflation.
ALSO READ: Budget 2020 Reforms For The NBFCs Sector, Its Impact & Other Key Takeaways Budget 2021: expectations are high The FM, on her part, has sounded out to the press that she is working on a “never-before budget”, raising the curiosity index. The big question is, how will the FM achieve the balancing act with the available books, since tax collections are down. With this in mind, let us look at the challenges that lay ahead.
Challenges - India’s GDP growth contraction in the financial year 2020-21 has been the sharpest since the 1950s.
- The badly-affected areas included the services sector, manufacturing, private consumption, investments and mining segments.
- Their repair and expansion may take many fiscal quarters. However, the upcoming CSO data in late January may offer some good news of revival in the second of the current fiscal to set a brighter base for FY21 estimates.
Rays Of Hope Among the avid watchers of the Indian
economy’s current trajectory, there is hope. They see positive signals of growth signs in the uptick in the following areas.
- Rise in GST collections
- Surge in customs duties
- Expectation about more spectrum auction revenue
- PSU disinvestments including Air India
These are indicators that can make a turnaround and pave the way to resurrect the downcast economy to pre-pandemic levels by next financial year.
ALSO READ: What NBFCs can expect from Union Budget 2019-20? FM’s priority areas in the budget For steering the economy out of crisis, budget 2021 India has to address burning issues like high unemployment, banking sector NPA, and rising inflation. The policy approach in the budget must incentivize consumer and Capex spending to rev up the recovery. Other key measures that are being expected out of the Indian government’s union budget are -
- Expand infrastructure spending massively and hike rural investments in MGNREGA and PM Kisan Yojana to bolster demand and jobs.
- Pay more attention to sectors of health, housing, construction, MSMEs, education.
- Follow the cue in corporate tax and slash personal income tax
- Expand bank credit to boost demand
- Solve the non-banking or NBFC credit concerns so that adequate credit guarantee schemes are in place
- Unlock revenue from PSU disinvestment within specific timelines
- Abolish taxes like dividend tax, and long term capital gain tax to encourage investors to tap capital markets
Why the Budget has to be a Balancing Act 1. Fiscal tightening can backfire The need for making the budget more growth-stimulating has been conveyed to the PM and FM by many economic experts in a recent virtual interactions.
The economists have cautioned the government against any fiscal tightening and urged them to go easy on the fiscal deficit limit in the new financial year.
2. Increase spending on infrastructure and rural sectors The government needs to scale up investment in infrastructure and many other core sectors including housing to induce a multiplier effect on the economy. The strategy of limiting consumption and increasing investments followed in the last budget should be a good thing to replicate this year as well.
3. Average Indian’s aspirations Budget watchers also want the government to increase investment in health and education; privatization of public sector assets, expansion of tax base; suitable tax compliance measures, and a focus on scaled-up focus on defence sector production.
4. Address concerns of stock market investors Despite the share market rally since November 2020 Sitharaman’s new budget is keenly awaited in the equity market circles to sustain the good show. Investors want to know the finance minister’s package for a recovery plan.
5. Business and Industry’s wish list The business and industry have enjoyed the feel-good factor from the reduction of corporate tax from 30 to 22 per cent in September. It was a good step in lifting the business confidence amidst the pandemic led slowdown.
However, capital market investors want to know the government’s mind on issues like rationalisation of Securities Transaction Tax (STT) that has the potential to boost the capital markets further. Investors are also expecting the government to address the concerns around Long Term Capital Gains Tax (LTCG) and slashing of the rate of tax to 5 per cent from the current 10 per cent of its total scrapping.
ALSO READ: Budget 2019 Offers NBFCs Various Enablers For Growth Ignore deficit control By and large, the forthcoming budget is expected to be big on expenditure projections and needs to be rightly so. The outlook on the nominal
GDP growth in FY22 has raised the compulsions on higher outlay for expenditure.
Increasing the overall expenditure growth in the new fiscal by at least 15 per cent is sanguine as capital expenditure by the private sector is already ahead by an average of 12 per cent. At the revenue front, the tax revenue needs to go up by an average of 15 per cent covering direct as well as indirect taxes.
The budget deficit can widen The pandemic’s shadow on the economy has upset the rational mix of debt and deficit variables’ linkage with the GDP. The fiscal deficit to GDP ratio is likely to shoot up to 7.1% while public debt to GDP is likely to zoom to 87% in the quarters ahead. Also, meeting the fiscal deficit target is not going to be easy when revenue collections are sliding down. So the onus is on Sitharaman to lay down a realistic Fiscal Responsibility and Budget Management (FRBM) outlook and start that exercise right away with the new budget presentation in India.
ALSO READ: Measures to boost the growth of Indian economy Cut Personal Income Tax in Budget 2021 The pandemic has hurt the lives in millions of households and working persons suffered by way of job loss and salary cuts. The finance minister needs to address the plight of the working class, unemployed and self-employed. A definite relief on personal
income tax is very essential to console the salaried class.
Apart from that, the MSME sector bore the maximum brunt of the COVID disruption and needs a special stimulus injection.
Given the limited scope to tweak direct and indirect taxes the space for job creation and revenue breeding will be more in the manufacturing sector where schemes like Production Linked Incentive (PLI) have brought out good results. The revival in the automobile sector can be a model for others and spill over to allied sectors helping to create more jobs and export options.
Stay tuned for more on the budget!