By Anagha Deodhar
The Indian economy was looking forward to Budget 2021 to press the reset button after going through the most severe economic crisis since Independence. Households, business leaders and policymakers expected the budget to provide some form of stimulus to recover from the damage caused by the Covid-19 pandemic. Leading up to the budget, there was a lot of hype around it. It was touted as a budget like never before, and a budget not seen in a hundred years. Half an hour into finance minister Nirmala Sitharaman’s speech, it was clear that the budget was going to live up to the hype.
As for the broad theme of Budget 2021, the government was faced with two choices: stimulate consumption or stimulate investment. While each choice has its pros and cons depending on the economic cycle, the government chose the latter. In the post-budget interaction with media, the finance minister and the ministry officials explained the choice. Given the income shock and heightened uncertainty caused by the Covid-19 pandemic, there was a risk that boosting consumption might not yield good returns. Possible increase in precautionary savings by households posed the risk of dampening the stimulus. Hence, the government chose to stimulate investments instead. Also, significantly higher multipliers associated with investment made the choice more attractive.
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Fiscal constraints to Budget 2021
There were some practical difficulties in executing the vision, most pressing among them was fiscal constraints. Leading up to the budget, most economists expected the fiscal deficit in the region of 7.5% in financial year 2020-21 and 5.5% in 2021-22. However, the FM surprised everyone by expanding the fiscal deficit by 6 percentage points in one year.
Interestingly, the Economic Survey had made a case for counter-cyclical fiscal policy to support growth. The Survey also noted that as long as the nominal GDP growth remains higher than nominal interest rate on debt, debt sustainability is unlikely to become a problem. It further added that India should not worry too much about rating implication of the fiscal slippage. This set the stage for what was to come – an expansionary fiscal policy in Budget 2021.
Between the current financial year (2020-21) and the next (2021-22), fiscal deficit as a percentage of the GDP is expected to increase by 6 percentage points (from 3.5% in FY21 to 9.5% in FY22). Out of this, my estimates suggest that revenue shortfall is likely to account for 35% (or 2.1% of GDP), non-debt capital receipts (mostly lower disinvestment) for 13% (0.8% of GDP), higher revenue expenditure for 28% (1.7% of GDP), higher capex for 2% (0.1% of GDP) and lower nominal GDP is likely to account for 21% (1.3% of GDP).
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Budget 2021: Put the money where the heart is
Let’s dig deeper into revenue expenditure. In FY21 revised estimates, the government upped revenue expenditure target to Rs 30.1 trillion from the budgeted Rs 26.3 trillion. Prima facie, the increase in revenue expenditure by Rs 3.8 trillion or 14% is expansionary. However, this number hides some important internals. Out of the 55 government ministries, 41 ministries are expected to spend lower than their budgeted targets for FY21.
Collectively, lower spend by these ministries amounts to Rs 1.08 trillion. On the other hand, only 14 ministries are expected to spend more than their budgeted expenditure. Their collective overspend is expected to be Rs 4.9 trillion. Out of these 14, only 3 ministries — ministry of fertilizers, ministry of consumer affairs, food & public distribution and the ministry of rural development account for an overspend of Rs 4.6 trillion.
A closer look at item-wise spend shows that most of the overspend in FY21RE is on account of three items – food subsidy (FY21RE Rs 4.2 trillion against budgeted Rs 1.1 trillion), fertiliser subsidy (FY21RE Rs 1.33 trillion against budgeted Rs 713 billion) and allocation under MNREGA (FY21RE Rs 1.11 trillion against budgeted Rs 615 billion. Hence, most of the additional expenditure (RE vs BE) in FY21 went towards providing free/subsidised food grains, subsidised fertilisers and for providing employment under MNREGA to returning migrants.
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Focus on transparency, cleaning books
Budget 2021 documents show that the government paid off FCI loans during the year. This is a break from recent practice of pushing large subsidy items below the line or off budget to deceptively show lower fiscal deficit. For FY22, the government has accounted for payments to FCI in the budget hence it looks like the practice of off budget spending will be discontinued in the future. This is an attempt towards making government finances more transparent and credible. The government seems to have utilised the pandemic-led fiscal slippage to clean up its books at modest marginal cost.
In FY22, fiscal deficit is budgeted to fall to 6.8% of the GDP – a cut of 2.7 percentage points from FY21 level. The largest driver of this consolidation is expected to be lower revenue expenditure (accounting for 2.3% of GDP or 85% of the consolidation), followed by higher non-debt capital receipts (mostly higher expected disinvestment receipts) accounting for 0.6% of GDP or 22% of the consolidation.
Revenue (tax and non-tax) as a percentage of GDP is budgeted to remain largely unchanged at 8% in FY21 and FY22, implying its contribution to consolidation is very small at just 2%. On the other hand, higher capital expenditure (FY22BE at 2.5% of GDP vs FY21RE of 2.3% of GDP) is likely to add 20 basis points to the fiscal deficit.
More importantly, the quality of government expenditure is seen improving in FY22. The government’s thrust on infrastructure spending is likely to boost capex-to-GDP ratio in the coming year. In FY22, capex is budgeted at 2.5% of the GDP, up from 2.3% in FY21RE and 1.8% in FY21BE. Also, revenue expenditure is likely to fall to 13.1% in FY22BE from 15.5% in FY21RE. This implies higher share of capex in total expenditure: 16% in FY22BE from 13% in FY21RE. Other revenue expenditure items such as major subsidies are expected to halve as percentage of GDP in FY22.
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Budget 2021: Spectre of high revenue deficit
On the flip side, the government is expected to use larger share of its borrowings to finance current consumption. Revenue deficit as a % of fiscal deficit (an indicator of % of borrowings used to finance revenue gap) is expected to increase to 79% in FY21RE, sharply up from 71% in FY20. This means the government will use smaller share of borrowings towards capital expenditure.
Budget 2021 expects nominal GDP to grow 14.4% in FY22 to Rs 223 trillion, partly due to the low base of -4.2% growth in FY21. The budget’s nominal GDP growth expectation is lower than the 15.4% growth expected by the Economic Survey. It also expects Gross Tax Revenues to grow 17% in FY22, implying a tax buoyancy of 1.16. Given the expected pick up in economy in FY22, these nominal GDP growth and tax buoyancy assumptions seem on the conservative side.
In the post-budget interaction with media, finance ministry officials admitted that tax assumptions were on the conservative side and that actual deficit prints were likely to be lower than budgeted numbers. The idea here seems to be to err on the side of caution, avoid giving overoptimistic projections, and as CEA KV Subramanian pointed out, “under-promise and over-deliver”.
Budget 2021 also had other important policy announcements such as disinvestment of two public sector banks and one general insurer, setting up of a bad bank, monetisation of assets, hike in FDI limit in insurance, and LIC initial public offer (IPO). Overall, the budget is growth-oriented, market-friendly, and reformist. There was a lot of hype around the budget this time and the FM definitely delivered on the expectations.
(Anagha Deodhar is Chief Economist at ICICI Securities. Views expressed in this article are personal.)