Union Finance Minister Nirmala Sitharaman presented Modi 2.0’s third and the first post of the pandemic Budget on Monday.
In a crisp and short budget speech, the finance minister focussed on government spending as a means to foster growth in an uncertain environment.
While the government has been blamed for not loosening its purse strings like other countries to meet the challenges of COVID-19, Nirmala surprised analysts by a higher fiscal deficit of 9.5% for the financial year (FY) 2020-21, ignoring the rating agencies.
The spend on healthcare has been increased by 137% for FY 2021-22, while capital expenditure is expected to grow by 35%. Capex is likely to kick in a multiplier effect on the economy creating jobs, boosting demand and resulting in fresh investments.
The markets gave a big thumbs up to the budget and Sensex was up 5% on Monday, the highest jump on a Budget Day since 1997. The Bank Nifty was up 8% on announcement of bank recapitalisation to the tune of Rs 20,000 crore.
Even on Tuesday, Sensex was up almost 1,400 points with Sensex nudging 50,000 points again. That would be a gain of almost 4,000 in just 2 days!
Moody's Investors Service, while silent on the sovereign rating on the higher-than-expected fiscal deficit numbers, expressed doubts over attaining the higher revenue targets and divestment realisation as assumed in the Budget, according to PTI.
Revenues are projected to be higher, capex higher, borrowings and fiscal deficit lower. Now let us try to understand the math behind the Budget.
1. Tax revenues: The tax revenues are expected to increase by 15% in FY 2021-22 to Rs 15.45 lakh crore. The income tax part appears achievable given the nominal GDP growth estimate of 15.6% for the year and tax buoyancy ratios of above 1 since 2000.
However, the central GST collection is estimated to grow by 23% to Rs 5.3 lakh crore. This is even higher than the FY 2019-20 collection of Rs 4.94 lakh crore. Given that Indian economy is barely reaching pre-COVID levels by next year, this target could prove to be challenging to achieve.
2. Income tax collection: Interestingly, the budget pegs personal income tax collections at Rs 5.48 lakh crore, which is higher than corporation tax collection at Rs 5.47 lakh crore for FY 2021-22. This doesn’t augur well for a developing country like India where a paltry handful of individuals pay taxes.
3. Disinvestment: The budget estimates Rs 1.75 lakh crore of revenue from disinvestment proceeds in the next year. While the budget lays a lot of emphasis on privatization, monetization of assets, IPO of LIC, given the past track record, this looks aggressive.
For the last year the government had estimated Rs 2.1 lakh crore receipts from disinvestment, but only 15% of this target is likely to be achieved as per revised estimates.
4. Capital expenditure: The capital expenditure which leads to creation of long term assets the benefits of which accrue over many years is estimated to increase by 35% to Rs 5.54 lakh crore. The government’s focus is on boosting infrastructure in the health, education and roads sector.
5. The overall expenditure to be incurred is almost flat at Rs 34.8 lakh crore. A deep dive shows the following:
- The NREGA allocation is down by about 35% to Rs 73,000 crore. This was increased to Rs 1.1 lakh crore last year after the budget to negate the impact of migrant crisis. However, given that the economy hasn’t yet recovered fully, rural unemployment is still high, and many migrants have still not come back to urban centres, this decline appears to be too high.
The agriculture allocation is down by 35% to Rs 3.82 lakh crore. Around Rs 1.5 lakh crore out of the Rs 2 lakh crore reduction in agri budget on account of reduction is under the food storage and warehousing head.
At a time when the government has promised doubling farmers income by 2022, there is a big farmer protest going on in Delhi and at a time when significant push is required for creation of a chain of cold storages, this reduction is baffling.
6. NREGA: The Rs 1.15 lakh crore increase in capex is primarily funded by a decline in NREGA and agri allocation.
7. Fiscal deficit: Resultantly, the borrowings are expected to decline by 18.5% to Rs 15 lakh crore in FY 2021-22. This brings down the fiscal deficit from 9.5% in this year to 6.8% in next year.
As we have seen in the past budgets, fiscal slippages do occur quite frequently. Any laxity in tax/or disinvestment collections would make the estimates go wrong as it will be very difficult to reduce government spending, the only lever working in the economy as of now.
That said, the finance minister faced extraordinary challenges of balancing growth and fiscal deficit. She has presented a roadmap to reduce fiscal deficit to 4.5% of GDP by FY26 which should please the rating agencies, and given precedence to growth in the current year and next year.
She has not fallen prey to the demands of levying a COVID cess which would have dampened sentiment.
The structural reforms announced in the budget including setting up of a Development Financial Institution, introduction of vehicle scrapping policy, creation of a bad bank, power distribution sector reforms, increasing the FDI limit in Insurance from 49% to 74% would hopefully pave the way for a V-shaped recovery.