How Budget 2021 Was or (Was Not) Business as Usual

This was the ninth budget under the Modi administration and the third budget presented by Sitharaman.

New Delhi: Finance minister Nirmala Sitharaman’s Budget 2021-22 speech started, as usual, with praising what the Modi administration has done for tackling COVID-19 in India amid ‘jai jawan jai kisan’ slogans by the Opposition, referring to the over two-month long farmers’ protest. Replacing the standard budget briefcase with the traditional red “Bahi-Khata” or cloth ledger in 2019, the finance minister this year stayed with it, albeit with a Made in India tab.

In fact, the choice of words in her budget speech, which mostly excluded terms like economic slowdown and unemployment, were similar to last year’s budget.

The only difference we could notice was that there were less number of people present and most of them were wearing masks. Also, this was the first time the budget went digital. However, in terms of announcements, it was comparatively less complicated and seemed like “business as usual”.

This was the ninth budget under the Modi administration and the third budget presented by Sitharaman. The Budget 2021-22 was divided into six pillars or categories: health and well-being, physical and financial capital, inclusive development, human capital, innovation and research and development, and minimum government and maximum governance.

“…we have spent, we have spent and we have spent,” said finance minister Sitharaman, after her budget announcements. With the sharpest GDP contraction in decades, a 45-year high unemployment rate, tumbling consumer confidence, and lack of easy credit, we are yet to see how this was a “never like before” budget.

The BSE benchmark Sensex zoomed over 1,700 points and the NSE Nifty reclaimed the 14,000-level driven by gains in financial stocks after Sitharaman’s budget announcements. The benchmark index gained 2314.84 points or 5% to close at 48,600.61 on Monday.

The government projected nominal GDP for FY22 at 14.4%. The Reserve Bank of India (RBI) had in December made a revision in the GDP contraction for the year ending March 21 to 7.5% from 9.5%.

Heath budget

Unlike previous budgets where health allocation was not a priority, this year the total budget outlay for schemes and measures related to health stands at Rs 223,846 crore – a 137% increase from last year’s budget estimate of Rs 94,452 crore. Of which, total outlay under health is Rs 73,931.77 crore.

During such unprecedented times of a pandemic, many were expecting to see stringent measures to revive the economy, especially in the budget for the health sector. Around 15% of the total allocation under the health sector has being given to COVID-19 vaccines, which is fairly inadequate.

Apart from this, nearly Rs 64,000 crore have been allocated for over six years under the PM Atmanirbhar Swasth Bharat Yojana, and Rs 2,217 crore for air pollution among others. According to The Lancet, the national GDP suffered a loss of 1.36% because of air pollution in 2019 – with Delhi bearing the highest per-capita economic loss due to premature deaths and illnesses caused by it, said news reports. Therefore, just over Rs 2,000 crore to tackle air pollution seems way too less for an issue as important as this.

On the bright side, some experts have hailed the mention of a vehicle scrappage policy in the budget, and said that the government has finally listened to them. However, details on the policy are yet to be out.

The government will merge the supplementary nutrition programme and the Poshan Abhiyan and launch the ‘Mission Poshan 2.0’ – an important step amid India’s poor raking in the global hunger index.

The finance minister announced the launch of the ‘Jal Jeevan Mission (Urban)’ that aims to provide water supply to as many as 4,378 urban local bodies with 2.86 crore household tap connections, as well as liquid waste management in 500 AMRUT cities. It will be implemented over five years, with an outlay of Rs 287,000 crore.

Financial and infra capital

To tackle the issue of long-term infrastructure financing, the finance minister introduced a Bill to set up a development financial institution (DFI), with a corpus of Rs 20,000 crore to capitalise this institution. The new DFI will have a target of a lending portfolio of at least Rs 5 lakh crore over three years.

Experts had pointed out the the need to ensure that the new DFI is soundly managed and delivers real public value, since it has a history of negative (and positive) experiences in this country.

Arun Jaitley’s budgets had always given a push to the infrastructure sector, with a focus on public investment.

Also read: Can a New DFI Fill the Vacuum of Long-Term Infra Financing and Revive the Indian Economy?

In this budget, the government has committed nearly Rs 1.97 lakh crore for production-linked incentives (PLI), starting fiscal year 2021-22, aimed at boosting domestic manufacturing. The PLI scheme provides incentives to large scale manufacturers, ranging from 4-6% of production value for five years, after they achieve their investment and production value target for each year.

The finance minister announced a 34.5% increase in capital expenditure to Rs 5.54 lakh crore in this budget, compared with Rs 4.49 lakh crore budget estimate of 2020-21.

“We will also work out specific mechanisms to nudge states to spend more of their budget on creation of infrastructure,” said Sitharaman. This area needs to be looked at as state government finances have always been constrained, and in this fiscal even more due to COVID-19.

Governments have always prioritized recapitalisation into public sector banks, however, the amount, as per experts, have never been sufficient to handle the non-performing assets (NPA) mess. This year too, the government has announced a further recapitalisation of Rs 20,000 crore in FY22. Additionally, India plans to privatise two public sector banks and a general insurance company in the next fiscal year.

Sitharaman also announced highway and road projects in poll-bound states, including West Bengal, Tamil Nadu, Kerala and Assam.

Boosting growth of small companies and startups

Just like last year, this budget also focused on reducing the working capital stress of small companies and boosting the growth of startups. The government has revised the definition for small companies under the Company’s Act, 2013, by increasing threshold from paid up capital to not exceeding 50 lakh to not exceeding Rs 2 crore, and turnover from not exceeding Rs 2 crore to not exceeding Rs 20 crore.

The government also allowed NRIs to set up ‘one person companies’ without any restrictions on paid up capital and turnover, allowing their conversion into any other type of company at any time.

Addressing toxic asset woes, the government announced setting up of an Asset Reconstruction Company (ARC) that would take over the existing stressed debt, and then manage and dispose of the assets to Alternate Investment Funds (AIFs) and other potential investors for eventual value realisation. Put simply, a ‘bad bank’ can help clean the balanced sheets of banks. “ARC will be set up to manage bad debt – basically bad bank will now become a reality. It will go a long way in resolving stressed assets in India,” Siddharth Srivastava, Khaitan & Co told the Economic Times.

Also read: It’s Budget Season. and That Means Talk of a ‘Bad Bank’ Yet Again.

Taxes

Relieving as we may call it, there were no changes in the tax system this year.

Other measures announced by the finance minister include: additional deduction for Rs 1.5 lakh crore for loans taken under affordable housing has been extended till 31 march 2022; senior citizens above 75 years of age with only pension income will now be exempted from filing tax returns; and a national income tax appellate tribunal centre to be set up.

With an aim to boost domestic manufacturing, the government has raised custom duty on some automobile parts to 15% with effect from February 2. According to reports, currently, the parts attract customs duty in the range of 7.5-10%. The increase in duty on auto parts may impact the end prices of vehicles. Added to that, earlier news reports have pointed out quality issues of auto components, due to financially and technologically weak vendors.

In 2018, Jaitley’s budget had also hiked customs duty on automobile parts, which was seen as a protective measure and faced backlash from countries like Germany.

A BloombergQuint report had cited a study which said that auto component makers have witnessed a double-digit contraction due to the pandemic and may take three-four year to grow. Therefore, after the budget announcements, Deepak Jain, president of Automotive Components Manufacturers Association, has hailed this step as encouraging and told PTI that he believes this will this will provide the MSME sector, which is largely dominated by auto parts manufacturers, the necessary succor as the industry recovers.

However, with a lack of spending in many essential sectors including education and COVID-related measures, this budget seemed like the movie Groundhog Day. Will it help in reviving the pandemic-stricken economy? Time will tell