By Naliniprava Tripathy and Darshan Gosalia
Budget 2021 has challenges aplenty as it comes in the wake of the Covid-19 pandemic that has ravaged all sectors of Indian economy barring agriculture. For the Narendra Modi government and its finance minister Nirmala Sitharaman, the most severe economic crisis since Independence presents an opportunity to reboot the economy. The coronavirus outbreak has also forced businesses to change the way they work. The economic survey 2020-21 tabled in Parliament on Friday has pointed to a V-shaped economic recovery with 11% growth in the financial year beginning April, offering a glimpse of the huge opportunity awaiting Indian entrepreneurs.
The massive vaccination drive rolled out by the government is a major factor behind this optimism. But the growth rate predicted by the Economic Survey hinges on high public investment and tax benefits to industries in Budget 2021. This is necessary for the industries and consumers affected badly by the Covid-19 pandemic and the steps taken to curb its spread. Hence, the budget’s focus should be on supporting the economic recovery, with an emphasis on relief to the common man.
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Rating firm ICRA expects the fiscal deficit to be around 7.5% of the GDP in 2020-21 — a more than 100% jump from the budget estimate of 3.5% — due to the contraction in GDP and the increased public expenditure to counter the pandemic and the economic crisis. The debt-to-GDP ratio is expected to be approximately 90% in the current fiscal. In such a scenario, Budget 2021 will have the conflicting objectives of economic revival and fiscal discipline.
Budget 2021 must focus on healthcare, social sector
The government should prioritise its expenditure with maximum outlay going to areas that will lead to economic growth. Expenditure on PMGKAY, PMAY, and MNREGA needs to be raised to spur growth in employment and consumption. From an industry point of view, government spending in healthcare is expected to rise. At present, the healthcare system in the country is grossly underfunded. The need of the hour is a robust healthcare infrastructure, more funds towards training of medical staff, improving the supply chain of vaccines, allocations for telemedicine, and a new healthcare plan to support the nation-wide vaccination drive. The government also needs to reduce taxes on the healthcare sector.
The infrastructure needs increased allocation with a focus on roads and projects such as Bharatmala Pariyojana. Higher allocation in urban infrastructure projects, smart cities, Jal Jeevan Mission, PMAY, and ports is needed to support economic revival.
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Budget 2021: Support to real estate, tourism
The real estate sector, the second-largest job creator in the economy, may be given infrastructure status. It will help reduce the cost of borrowing for developers. Further, an input tax credit under GST should be made available to them to improve the margins of developers, who may pass on the benefits to consumers, thereby reviving demand.
The government should also look at reducing the GST, higher tax rebates on housing, lower stamp duty, and more liquidity into the sector. Further, a higher income tax rebate on the interest component of housing loans from its current level of Rs 2 lakh would be desirable.
The tourism industry has crashed due to the impact of the Covid-19 pandemic and travel restrictions. The sector may be brought under the concurrent list so that states may remove certain regulatory requirements, improving the ease of doing business in tourism industry. Also, the hotel industry is seeking infrastructure status so that it can obtain funds at cheaper rates.
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Boost domestic industry, banking system
At a more generic level, further impetus should also be given to the Aatmanirbhar Bharat initiative to boost local manufacturing. The introduction of additional PLI schemes can promote local manufacturing and exports. The start-up ecosystem is one of the major growth drivers for the economy. The government may introduce new incentives and credit grants for start-ups and MSMEs, which can generate employment opportunities in the economy.
The banking sector is the backbone of the financial system in India. However, it is burdened with high level of NPAs. Budget 2021 should offer funds to recapitalise banks that are in need. Also, banks can create a ‘bad bank’ and transfer their bad loans to it. The government should fund part of the equity in this bank.
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From the public revenue perspective, various measures should be taken on the direct and indirect taxes fronts. Additional relief in the form of increased Chapter VI (A) deductions and changes in slab rates would leave more disposable income with individuals, boosting consumption in the economy. A similar measure should be taken in corporate taxation too. Budget 2021 has set high expectations among individuals and industries as the economy is still limping back to normalcy.
The finance minister must ensure that Budget 2021 is ‘the budget of the century’ in its true meaning and intent. Only an exceptional budget can liberate the economy from the impact of the pandemic and boost economic growth and prosperity in the country.
(Dr Naliniprava Tripathy is Professor (finance) at IIM Shillong. Darshan Gosalia is a chartered accountant and a PGP student at the IIM. Views are personal.)
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Naliniprava Tripathy is an Indian economist based in Shillong. She teaches finance at IIM Shillong.