A Covid-struck economy staging a V-shaped recovery needed a bold and imaginative Budget to keep the recovery going. Finance Minister Nirmala Sitharaman delivered precisely such a Budget and even went beyond expectations by refraining from imposing the much-rumored Covid tax. The greatest merit of this Budget is that it clearly indicated that the economic policy of this government is in the right direction. Undeterred by the farmers strike, the government has made it clear that it will go along ‘the road less travelled’ when it comes to economic policy. The proposal to privatize two nationalized banks and one general insurance company is a clear message that privatization is on top of the government’s agenda. Raising the FDI limit in insurance to 74 per cent from 49 per cent is a step in the right direction. The proposed Asset Reconstruction and Management Company will help clean up the banks’ balance sheets. India’s financial sector is headed for much better times.
No news is good news
The thumps up given by the stock market to the Budget stems from the conspicuous absence of new tax proposals and the focus on growth. There were rumours that the government may consider raising more money through STT and LTCG since the stock market gained from the pandemic. But the government did the right thing in rejecting this thought and decided to focus, instead, on raising money from the buoyant stock market through disinvestment and privatization. The disinvestment target of Rs 175,000 crore can be comfortably achieved in this bullish market. The challenge, however, is in implementation.
Debt financing a concern
Even though the absence of new tax proposals is a big relief, there is a concern on huge reliance on financing the expenditure through borrowing. The fiscal deficit at 9.5 percent of GDP for FY21 is worse than expected and the FY22 target of 6.8 percent is on the higher side. The government targets to borrow around Rs 12 lakh crore to finance the expenditure of Rs 34.83 lakh crore. However, it is a relief that Rs 5.54 lakh crore of the proposed expenditure is capital expenditure. Bond yields are likely to rise, going forward.
Erring on the side of caution
It is possible that the actual deficit may be lower than what was projected in the Budget. The FM has been very conservative in assuming a 14 per cent nominal GDP growth and 14 per cent tax revenue growth. Going by the latest trends in high frequency indicators like electricity consumption, e-way bills, GST collections and sales of cement, autos and steel, 11.5 percent GDP growth, 16 percent nominal GDP growth and 18 percent growth in tax revenue are within the realm of possibility. This is likely to bring the fiscal deficit down.
The Budget has struck a fine balance between India and Bharat through increased allocations for health care, infrastructure, agri-infrastructure, rural development and agriculture.
In these nightmarish Covid times, the FM has to be appreciated for delivering a ‘Dream Budget’.