Making the Budget work in practice–the economic times

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In an interview to this newspaper, Finance Minister Nirmala Sitharaman said the budget’s focus was a stimulus that would ‘make a difference to the economy’. The Centre’s expenditure, budgeted at 15.6% of the GDP for 2021-22, is high, compared to 13.5% of the GDP in the recent past (except in 2020-21 when expenditure amounted to 17.7% of the GDP due to the fall in growth and surge in spending). The 34% jump in the allocation for capital expenditure to revive investment makes eminent sense. The focus now must be to execute the big spending that has been budgeted to get the economy back on track. Completing investment in projects that are ready to take-off should be a priority. The Centre’s revenue projections are not overambitious, efficient tax administration can easily overachieve the targets.

Concerns raised over the budget proposal to set up a bad bank to relieve banks of their burden of bad loans are misplaced. To ease the flow of credit to fuel recovery, banks must be freed from their bad loans. True, these loans are more complex than housing mortgages and will take time and expertise to resolve, either by sale or by liquidation under the Insolvency and Bankruptcy Code. That is why these must be placed in the custody of patient capital. As non-performing assets would have to be sold at a steep discount to the original loan value, bankers must be shielded from criminalisation of their actions. However, the notion that the bad bank cannot be owned by banks, as they cannot simultaneously be sellers of bad debt and its buyers, as equity holders of an entity that buys the debt, has no merit. The first-ever bad bank was set up in 1988 by Mellon Bank of Pittsburgh to relieve it of bad loans. If the bad bank buys assets cheaper than normal, and its profits are larger than normal, these would go back to the banks themselves.

Reform to lower the government’s stake in some PSBs below 50% will improve the health of banks, in terms of capitalisation and functional efficiency. Also, rationalising GST rates would be a sound move.

This piece appeared as an editorial opinion in the print edition of The Economic Times.


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