A promising Budget with a few disappointments

2nd February, 2021 Economy

Besides impacting the disposable incomes of the people, the Union Budget is significant for three reasons.

First, it delivers the balance sheet of the government and informs us about what happened in the past year and what is proposed to be done in the next year.
Second, it shapes the macroeconomic environment of the country in terms of its proposed impact on the macro economy due to decisions on raising resources and spending.
Finally, it provides reform signals on which economic agents place their expectations.

Positives:

The Union Finance Minister has presented the 2021-22 Budget which, if effectively implemented, promises to revive the economy faster and take it on a higher growth trajectory.
It not only addresses the immediate requirements to augment aggregate demand by increasing infrastructure spending, but also initiates reforms in critical areas to take the economy on a higher growth trajectory in the medium term.
Unlike in normal times, when the concern is on deficit and debt, the focus this year is on how the Budget helps in increasing aggregate demand, particularly by increasing investment expenditure, and more importantly, how it addresses several structural weaknesses which have reduced the growth potential.

Reviving the economy:

The Economic Survey had reiterated the need to have counter-cyclical fiscal policy, focused on accelerating growth for ensuring debt sustainability, and emphasised the importance of public investment expenditure which have higher fiscal multipliers to ‘crowd in’ private investments.
It had also argued that the rating agencies are biased and advocated increased borrowing for public investment spending by quoting Rabindranath Tagore.

Effect on economy:

It was clear that the pandemic badly impacted the balance sheet, but it was important to know how bad the impact was.
The estimated contraction in revenues in 2020-21 was almost 23% from the Budget estimates. The tax revenue shows a decline of 17.8% and non-tax revenues are lower by 45% from the Budget estimates.
Despite this, contrary to expectations, the government has not compressed expenditure.
Both revenue and capital expenditure have gathered pace since October and the revised estimate for 2020-21 is higher than the Budget estimate by 14.5% and 6.1%, respectively.
It is thus not surprising that the ratio of fiscal deficit to GDP for 2020-21 is estimated at 9.5%.
The implication of this is that besides favourably impacting other sectors’ income generation, the GDP estimate for the third and fourth quarter from public administration, defence and other services is likely to turn positive from -14.9% witnessed in the first half of the year.
The Budget shows a higher growth of revenue at 15%.
The tax revenue is expected to be higher by 14.9% over the revised estimates of 2020-21 and non-tax revenue is expected to increase by 15.4%.
The disinvestment proceeds are placed at Rs. 1,75,000 crore as against the estimate of Rs. 32,000 crore for the year.

Disappointment:

The disappointing thing about the Budget, however, is the continuation of the protectionist trend.
In the name of self-reliance, we seem to be returning to the pre-1991 days.
The Budget seeks to remove exemptions on a number of items and increases rates on some others, including some agricultural products such as cotton, raw silk and silk yarn.
There is a broad-based infrastructure cess as well. This is surely retrograde in an otherwise promising Budget.

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