Synopsis–The 2021-22 deficit is projected to decline to 6.5%, still very high, and similar in size to India’s fiscal deficits after the 1991-92 and 2008-09 crises. Those for a larger fiscal stimulus should be happy. Will it work?
Nirmala Sitharaman has thrown everything but the kitchen sink at the Covid-19 pandemic. The fiscal deficit in 2020-21 is likely to rise to 9.5% of GDP — with 1.5% coming from one-time transparency — making it the highest in India’s history. The 2021-22 deficit is projected to decline to 6.5%, still very high, and similar in size to India’s fiscal deficits after the 1991-92 and 2008-09 crises. Those for a larger fiscal stimulus should be happy. Will it work?
The recovery, so far, has been more K- than V-shaped. With GDP growth contracting by about 15% in H1 2020-21, it must be on a substantial rebound if it is to average –8% for the entire year. Leading indicators such as electricity use, GST collections, vehicle sales, rail freight, Purchasing Managers’ Index (PMI) and e-way bills show a recovery is underway. But several key sectors such as oil and gas, cement, fertilisers, and tourism and travel are still down. And there is unevenness between corporates, MSMEs and the unorganised sector.
The unemployment rate has improved, but employment remains below pre-pandemic levels. The huge increase in demand for MGNREGA work in 2020-21 shows the impact on livelihoods has been huge, with 80-100 million people projected to fall back into poverty. Will the budget nurture and widen the recovery? With projected real GDP growth of over 10% in 2021-22, India’s GDP would go back to pre-pandemic levels. To achieve this, the budget puts large sums into capital expenditure — an increase from 12.5% pre-Covid to 16% for 2021-22. Even if the entire increase is not genuine capital expenditure — for instance, some of the expenditure on railways and in Food Corporation of India (FCI) — there is an upward trajectory. If this money is directed towards shovel-ready projects in the National Infrastructure Pipeline (NIP), it could have large multiplier effects.
More money for completion of unfinished projects should also be a priority. But with elections looming in Assam, Tamil Nadu, West Bengal and Puducherry, a large share will end up in new projects in these states and Union territory. Badly hit sectors like real estate, travel and tourism have not been given any specific help.
In a higher orbit
To help finance higher capital expenditure, divestment — called ‘privatisation’ for the first time — remains on the agenda. GoI should take a leaf out of former PM Atal Bihari Vajpayee’s book and set up a separate ministry, with a five-year plan for it, instead of yearly targets.
Monetisation of assets is another large source of financing proposed, especially if the agency whose assets are involved shares in its proceeds. But transparency will be important, so that it all does not end up in the hands of cronies.
With capacity utilisation improving, but still at levels close to 50-60%, India is unlikely to see immediate recovery in private investment. But along with public infrastructure that can crowd in private investment, the production-linked incentive (PLI) scheme, if implemented smartly and linked to state-level initiatives, could draw in new investment. A development finance institution (DFI) to provide long-term finance is provisioned for, but will need professional management.
Delaying financial sector clean-up is the surest way to a weak recovery. The elephant in the room is rising non-performing assets (NPAs), projected by RBI to reach almost 14% by June 2021. The announcement, finally, of a ‘bad bank’ is recognition that the Insolvency and Bankruptcy Code (IBC) process takes too long for resolution of systemic NPAs. Announcing the privatisation of two State banks is the first signal of reversing bank nationalisation of 1969. But one hopes these are not just cleaned up and sold to corporates.
High priority has been given to healthcare, with an increase of 37% over the previous budget. Half of this will go towards vaccination, with more to come if needed. If India can vaccinate its entire 1.4 billion population in 2021-22, it will have a huge impact on lives and livelihoods. State governments should follow this lead.
The budget relies on recovery to help the poor. But employment will not recover as quickly as GDP. Cash transfers, even small amounts, would have helped below-poverty-line (BPL) families. Free food rations to BPL families should also have been continued for another six months and the MGNREGA budget allocation in 2021-22 may have to be increased if the demand for jobs remains. ‘One Nation, One Ration Card’ for migrants should be expedited, and will encourage migrants to return.
As strong as the link
By continuing down the path of further import protection, questions on ‘Atmanirbhar Bharat’ will remain. With compressed domestic demand and a robust global recovery underway, an export push would have been the way to ensure faster recovery. Instead of textile parks, export processing zones (EPZs) and port-led development to attract FDI in labour-intensive exports may give India a better way to enter global value chains (GVCs).
The ‘Spend and Grow Budget’ has its risks. With a public debt-to-GDP ratio close to 90%, it takes on huge increases in public debt, but does not grow as rapidly as projected. The huge lifeline the FM has thrown may then pull India overboard and into dangerous waters. But the intent to grow our way out of this crisis is the right one. It had to be taken.
The writer is non-resident senior fellow, Atlantic Council, Washington DC, US.