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Looking at the announcements, the perception is one of a choice made towards efficiency and pragmatism rather than aiming for the spectacular
Considering GDP will decrease by 7.7 per cent in FY21, and the Budget deficit for the fiscal year has been revised upwards to 9.5 per cent of GDP, it is easy to realise the enormity of the challenge that Finance Minister Nirmala Sitharaman was facing in presenting Budget. And this, given the fact that the first recession since 1980 had come after a year of very mediocre growth.
Looking at the announcements, the perception is one of a choice made towards efficiency and pragmatism rather than aiming for the spectacular.
A careful balance has been struck between a number of measures. There has been significant social support measures and allocation to the health care sector towards the segments of the population most affected by the pandemic and the recession. This is designed to have as rapidly as possible a direct impact on providing some relief and to help revive domestic consumption.
There were measures to support SMEs and start-ups as important components of India’s economic fabric. In that respect, the increase of maximum threshold of paid-up capital of small companies and of maximum turnover will bring a great number of SMEs under the denomination of small companies, which have a lower compliance burden.
There were measures for the agri sector that has been shaken by the way the government implemented reforms and a number of measures in the tax domain designed to improve the business environment and create more predictability by reducing the uncertainties created by the overdone and sometimes arbitrary practice of retroactive taxation. Last, but not the least, there was a big funding effort to accelerate infrastructure development, with incentives to attract FDI.
Even if economic growth in the new fiscal year were to reach the ambitious target of 11 per cent, the anticipated government revenues will not – by far – be able to cover the expenses for the whole set of measures announced in the Budget. The only hope for reducing this gap will rest on the successful completion of divestment in two public sector companies and financial institutions.
However, one needs to look at revenue expectations with a note of caution. Whatever the party in power, the central government has not been very successful in implementing divestment plans and revenues have always fallen short of expectations. It remains to be seen if the fiscal pressure of the present situation – and the urgent need to boost economic activity – will create the conditions for an efficient execution of divestment plans.
This being said, like almost every other government in the world, the Narendra Modi administration is right to consider that while trying to keep the Budget deficit under the maximum possible control, the No.1 priority has to be the triggering of a recovery process and the alleviation of the social pains and dislocations created by the pandemic. This means creating the conditions for people who have lost their livelihoods to find a job again. Job-creation and boosting consumption are more than ever a top priority, and at the same time a huge challenge, for the government. And, this will most probably mean a FY22 Budget deficit of 5-7 per cent, depending on the pace of the recovery.
In that respect, the creation of a Development Finance Institution (DFI) for long-term financing of infrastructure projects is to be welcomed, with the government clearly betting on a boost to infrastructure development for jobs creation and for reviving demand in the economy.
With Sensex jumping close to 5 per cent, Indian businesses have clearly cheered the flurry of measures. The foreign business community will also most certainly welcome the orientations set for this new fiscal year.
The balance between the social support measures and the ones designed to improve the business environment looks quite adapted to the circumstances.
It is a moot question of whether this Budget is too timid or not, whether stronger measures could have been unveiled. What will be of importance is whether the measures will help assuage the anger of farmers, whether they will avoid unnecessary moves that would create a distraction from the priority that needs to be given to recovery and alleviation of the sufferings from the pandemic, and whether the implementation of the measures will be fast and efficient.The writer is chairman of Smadja & Smadja, a strategic advisory firm