Budget 2021: The upcoming Union Budget looks set to focus on supporting growth recovery. The economy fights to come out of the pandemic-struck trough and the need for further strong and decisive fiscal support remains unmistakable. Importantly, even after factoring in a near double digit growth, India’s FY22 GDP in absolute terms will likely stay just aroundthat during FY20. Effectively, this implies two consecutive years – FY21 and FY22 – of near-zero growth in real GDP.
During this year’s budget, the government would need to focus on two key segments of the economy that have been impacted by the pandemic in their own ways unique. On one hand, businesses would need to be supported by enabling the revival of consumer confidence; and on the other hand, the welfare of the socio-economically vulnerable segments of society would need to be ensured.
Reviving business and consumer confidence is key
Recovery in growth in the near term hinges critically on private consumption picking up; other key drivers of growth –investments and exports – will likely take longer to revive. However, consumer confidence has clearly been weakening even before the pandemic broke out. The RBI’s consumer confidence index dropped almost substantially from 104.6 in March 2019, to 85.6 in March 2020and further to 52.3 in November 2020. Today, about 71% of urban consumers feel that they will not increase their discretionary spending even one year later, which can be problematic for businesses that cater to consumer with a diverse range of goods and services – ranging from the essential to the discretionary.
The upcoming budget may focus on finding ways and means to help restore consumer confidence from the unprecedented lows experience. While likely easing in the intensity of Covid-19 in the coming months might help, recovery in confidence might take longer given niggling uncertainties on multiple fronts and the absence of a strong social security net.
Need to bite the bullet and accept a wider deficit
Against that backdrop, one expects considerable widening in gross fiscal deficit (GFD). The Budget may pegFY21 GFD to a range of 6.5%-7% of GDP, while the final figure may come in further higher by around 50 basis points. This will be materially higher than the government’s initial estimate of 3.5% of GDP a year ago and 4.6% of GDP during FY20. GFD estimate for FY22 GFD is expected to be slatedbetween 5.0%-5.5% of GDP.
While this will mean significant deviation from the fiscal responsibility and budgetary management (FRBM) roadmap for both the years – something that the government can’t avoid as it looks to script an economic revival – a decisive and credible stance on near term fiscal deficit and FRBM targets is the need of the hour. It is crucial that the government presents a credible path for revenues and focusses on the composition and quality of fiscal spending rather than merely targeting a set ofheadline deficit numbers.
Accordingly, it is important for the government to step up fiscal spending during FY22 as it will likely enjoy the tailwind of somewhat better revenues. Overall, the central government’s spending may be projected at a double digit growth during FY22, following a relatively modest mid-single digit growth in the previous year. In this context, one must note that the fear of wider fiscal deficit resulting into risks to sovereign rating is only a partial picture, as dent in growth potential can also lead to rating downgrades.
Focus on strong growth multiplier
Given the scarce fiscal headroom, better targeting of government spending is crucial. The government will likely prioritise areas such as MSMEs, affordable housing, rural economy, infrastructure, which can stimulate growth for a whole host of goods and services, and also lead to large scale job creation. We expect continued support for social security programmes in healthcare and rural infrastructure such as electrification and irrigation schemes, MGNREGA, and skill enhancement providing employment and income support to the masses. This would help reduce future dependence on fiscal support.
One needs to also be mindful that near-term fiscal spending should not come at the cost of the government’s capital expenditure programme. If that happens, it could dent the country’s long-term growth potential. One would remain curious about a few reforms and policy initiatives that have recently been discussed. For example, there have been discussions about setting up a development finance institution that may focus on the country’s infrastructure financing needs, and constitution of a well-capitalised asset reconstruction company (commonly referred to as a “bad bank”). Focus will also be on the government’s plan for recapitalising public sector banks, especially amid forecasts of rising NPAs.
Support for the more vulnerable segments
One must recognize that India’s fiscal spending support had been lower than several peersduring the Covid-19 pandemic. Now, that the economy is displaying early signs of recovery, timely and adequate fiscal support can significantly boost recovery prospects. Furthermore, the pandemic has brought in serious threats of further worsening of socio-economic inequality, which has been on a widening trend.
It isthusimportant for the government to consider fiscal policy initiatives that can effectively extend better support to the more susceptible segments including poor households and small businesses.
In this context, of late, there had also been debates around imposing a one-time Covid-19 relief cess and/or a wealth tax on rich households. While broadening the tax net remains the key towards better distributive justice and a more egalitarian society in the long run, measures like a super-rich tax or surcharge may not be ruled against the current macro backdropdespite certain drawbacks. However, importantly, one feels that such a tax / surcharge, if at all imposed, should be considered only for a brief and specific period of time (say, 1-2 financial year/s), rather than for an indefinite period.
[Author Siddhartha Sanyal is Chief Economist & Head of Research in Bandhan Bank.]
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