Nirmala’s Budget: Caveats & Disappointments

By Inderjit Badhwar

Last week, the front pages and broadcast headline news should have been plastered with news stories about the Modi government’s new budget proposals. But the farmers’ accelerating protest, now gaining international and national momentum, eclipsed this subject as it did the January 26 national Republic Day parade that was shown on split screens alongside the kisan tractor rally and a protest flag being hoisted at the Red Fort just below the national flag which symbolises the nation’s unity, integrity and sovereignty.

But the budget received lesser attention than it should have, barring the portions which stressed on increasing disinvestment in core public sector enterprises as well as a boost to much-needed direct foreign investment. That these topics received greater attention was partly because, politically, they were connected—albeit tangentially—to the farmers’ issues. In addition to legislative guarantees of minimum support prices to their produce, a major ideological grievance of the farmers’ movement has been their fear that the autonomy of farmers and the agro-economy they have fashioned, and which sustains them through a plethora of traditional, local inextricably interwoven commercial ties and initiatives, is being snatched from them and turned over to corporate interests. The budget—because of its emphasis on more disinvestment, fuelled this flame of resistance to “the people’s wealth” being sold off to politically favoured oligarchs. It’s like selling off the family silver.

In this issue of India Legal, our columnist Shivanand Pandit takes a close look at the budget and what it proposes to do. It is not, as earlier budgets presented by the Modi government were, a wishy washy document. Following the massive shocks to the economy delivered by demonetisation, the hasty implementation of GST, the absence of meaningful tax reforms, the Covid-19 pandemic which has collectively led to a dramatic fall in employment, growth, export, investment, industrial production, consumer confidence and spending, the Modi government has tried to put an honest-to-goodness  growth plan in place by announcing “a bold and new-age budget”, argues Pandit. Now the mega task before the government lies in the execution of the plan.

Pandit writes that in an attempt to accelerate India’s growth after a once-in-a-century tremor, the finance minister has pressed a few right buttons. In Budget 2021, Nirmala Sitharaman “has fundamentally come clean on the budget arithmetic. By declaring higher fiscal deficit numbers of 9.5 percent of the GDP and 6.8 percent of the GDP for FY-21 and FY-22, respectively, she has placed the convincing assessments of revenue receipts and recognised ‘off balance sheet’ expenditures.”

Pandit’s analysis and assessment of the new budget (Budget 2021: Now the Hard Part) is original and thought-provoking and deserves careful reading. I will not go into its details but rather summarise the highlights as well as the caveats and disappointments:

• The budget’s emphasis on increasing public investment by 34.5 percent in the fiscal year 2021-2022 compared to the current fiscal year 2020-2021 is impressive. The government will borrow an extra Rs 80,000 crore for the purpose in the next 60 days. Where will the money come from? Sitharaman’s answers were forthright: tax revenue realisations, disinvestment proceeds, sale of rail and road assets and the government’s capacity to nurture resources from the market, without raising interest rates for the private segment.
• Facing the nastiest contractions among the world’s leading countries, India’s gross domestic product (GDP) net of inflation and per capita income are expected to decline by 7.7 percent and 8.7 percent, respectively, compared to the preceding fiscal year 2019-2020. The budget, however, has very little acknowledgement of the socially explosive employment crisis. Yet, the government’s additional public spending to deal with the unique emergency has been a little over 1 percent of GDP. The only way out is a massive fiscal stimulus, direct and indirect even if it means generating superfluous consumption to keep stimulating demand. This is what America and other European nations are doing.
• Raising demand through fiscal stimulus packages is a key to reviving economic activity in small commercial hubs and charging up the batteries of rural markets which are the lifeblood of fast-moving consumer goods, small businesses and village-based enterprises. But rural stimulus measures like National Rural Employment Guarantee Programme (MGNREGA) have seen their allotments decreased. This seems to indicate a puzzling government misconception: It does not think of resumption of domestic demand as part of the remedy for the current miseries of the economy.
• It was encouraging to see recognition of the importance of the health infrastructure. But this needs more clarity which may well emerge in future pronouncements from related ministries. If it relates to investment in enhancing urban sanitation, drinking water and sewage amenities, it is to be applauded. But it must avoid the pitfalls of the Rural Swachh Bharat Abhiyan. This admirable project has failed to achieve its aims because we seemed to be putting the cart before the horse. Simply erecting low-cost toilets in rural and mofussil houses is no panacea unless the activity is backed up by access to water, sewage and sanitation services.
• The dreadful pandemic has alerted world governments to massively increase public sector spending to ensure universal accessibility and affordability of vaccines. In India, the total spending on the health sector, which is expected to be around Rs 80,000 crore in 2020-2021, is estimated to decline to just above Rs 71,000 crore in 2021-2022. How will the government be able to fulfil its promises to make Covid-19 vaccines available for all?
• Prosperous developing economies have relied on development finance institutions for offering long-term credit for infrastructural expansion. In this context, the budget’s proposal of Development Finance Institution (DFI) is delightful. However, the budget speech stated that the anticipated DFI will be funded by Foreign Portfolio Investments (FPIs). This is a matter of grave concern because FPI symbolises short-term inflows with exchange rate perils, while infrastructure investment is long-term whose incomes will be generally in rupees.

Also Read: Budget 2021: Now the Hard Part

Pandit concludes that in India, economic inequality or disparity is rising. On the one side, a large number of poor people lost their livelihoods in 2020 and on the other side corporate tycoons are sitting on “the tall mountain of profits.” The finance minister of India has failed to address this mega concern of the country and the budget has not considered levying offset taxes as many developed nations are doing.