Budget 2021: Economic recovery and beyond

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By Anandadeep Mandal and Neelam Rani

The Union Budget 2021 will be presented in the Lok Sabha by finance minister Nirmala Sitharaman on February 1. The initiatives in Budget 2021, coming in the backdrop of the Covid-19 pandemic and the resultant economic crisis, will be crucial for the ongoing economic recovery. The Narendra Modi government has taken some decisive steps to contain the spread of Covid-19 to ensure the revival for the battered Indian economy. Thus, the expectations are running high from the eighth Union budget of the NDA government.

While there is a lot to be done to take the Indian economy to pre-Covid19 levels, Sitharaman is constrained by poor revenue collection and a weak fisc. Here’s what she is expected to do in Budget 2021, considering the weak fiscal position and the slow growth in consumer demand.

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Income tax sops likely in Budget 2021

Income tax proposals are among the most important parts of a Union budget. The finance minister is expected to offer some relief to taxpayers in Budget 2021 to leave more disposable income in their hands. Incentives are likely for those setting up manufacturing units and executing infrastructure projects. There could also be a cut in entertainment tax, while petroleum products may be brought under the ambit of the goods and services tax (GST).

Thrust to renewable energy

The finance minister may offer several measures to support renewable energy sector. Sops to sustainable energy is in line with India’s international commitments to clean environment. Budget 2021 may offer an earnest push to phase out old and polluting combustion engines. Thus, manufacturers of electric vehicles are expected to get incentives, including a lower GST slab.

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Budget 2021 focus on healthcare infrastructure

The key lesson that all economies can take from the Covid-19 pandemic is that the well-being of the people is the most important determinant of the health of the economy. Apart from ensuring growth in the number of hospitals and local health centres, Budget 2021 is expected to expand the scope of Ayushman Bharat PM-JAY. Penetration and availability of healthcare insurance is critically low among middle- and lower-income households.

This is the reason why the out-of-pocket healthcare expense of Indians is around 44%, compared with the global average of 18%. The government is expected to make provisions for increased insurance cover. Enabling Ayushman Bharat PM-JAY to cover taxpayers will safeguard those contributing to nation-building.

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Healthcare skill development

The pandemic has exposed a shortfall in the number of healthcare experts in the country. Skilled workforce in healthcare ecosystem is a necessity precondition for sustainable economic growth. With new technology, products and challenges relating to the pandemic available, the government should give priority to training of healthcare professionals.

Budget 2021 is expected to provide incentives to private institutions that can contribute in this space. The government is expected to help in the development of training infrastructure and skills enhancement. This needs to happen at all levels from medical colleges to institutes that train nurses and paramedics.

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Artificial intelligence and digitisation

Indian companies have the potential to leverage AI across business processes to optimise cost and productivity. This will not only benefit larger enterprises, but also address key issues faced by the MSMEs such as payment receipts and timely payments. Sectors such as FinTech, EdTech, HealthTech, and PeopleTech are expected to get a boost in Budget 2021. Further, as MSMEs are next only to agriculture in driving economic growth, the budget may provide credit facilities to companies to enable technology adaptation.

Support for innovation and expansion

Indian manufacturing sector showed agility during the Covid-19 pandemic to scale up capacity in products such as PPEs, medical and testing kits, as well as essential drugs. The government is expected to make a special provision to ensure that this potential is not lost. The need of the hour is innovative financial instruments such as low-collateral debt to help industry meet capacity expansion and working capital requirements. Dedicated grants to start-ups and innovators may find a place in Budget 2021.

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Robust supply chain infrastructure

The government must ensure that the vaccination drive is not a one-time arrangement. The finance minister should see this as an opportunity to build the country’s healthcare infrastructure to meet it immunisation targets. Thus, inclusion of supply-chain infrastructure projects is expected to be given a boost in Budget 2021.

Infrastructure status to real estate

The impact of pandemic on the real estate sector has been immense, resulting in delays and cost overruns. Liquidity flow has become critical to the sector to sustain itself. Thus, giving infrastructure status to the real estate industry will give the necessary boost to this sector. Further, reintroduction of input tax credit will be beneficial. A reduction in stamp duty and GST may be announced by finance minister Nirmala Sitharaman in Budget 2021.

Atmanirbhar Bharat

Vocal for local: Atmanirbhar Bharat will have a revolutionary impact in achieving the Narendra Modi government’s economic goals. With many start-ups working to change the economic landscape of the country which is predominantly rural, Budget 2021 is expected to incentivise the MSMEs that contribute in this space.

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Retail sector growth

The retail sector has been one of the worst affected during the economic crisis. Taking into account the adverse impact of the Covid-19 pandemic on this sector and the subsequent slow recovery, the budget may contain a special package for retail sector. Retailers may be allowed to register as MSMEs to help them accumulate credit, channelise working capital and effectively manage their investments and output.

As Budget 2021 will be presented after a disastrous year that saw major economic reversals, finance minister Nirmala Sitharaman will need to step up public spending in sectors that can generate a large number of jobs and offer long-term economic benefits. She may have to ignore the fiscal limits set by the FRBM Act to put the Indian economy back on track.

(Dr Anandadeep Mandal is an Assistant Professor of finance at the University of Birmingham, UK. Dr Neelam Rani is Associate Professor in finance at IIM Shillong.)

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Dr Anandadeep Mandal is Assistant Professor in finance at the University of Birmingham, UK.