The 2020 budget faced wide diversions from its projected course due to high uncertainty caused by the COVID-19 pandemic. Initially designed to cater to varying economic needs of multiple sections of society, in the backdrop of sluggish growth and low tax collections clubbed with slow domestic demand, the 2020 budget did maintain fiscal prudence. It was focused on structural reforms in the financial sector and on credit access. It had proposed changes in the banking laws to enable public sector banks to raise funds from capital markets and flexible debt restructuring for the NBFCs. However, with economy hit by pandemic, the newer challenges had emerged. Government had to take a cautious approach in response to the social and economic impacts of the coronavirus crisis. In this regard, a stimulus package of Rs 20 trillion was announced for businesses and workers. Whether the stimulus was sufficient for the economy is another debate, the unprecedented challenges posed by the pandemic has led to steep rise of the fiscal deficit and for year ending in March 2021, it is likely to be over 7% of gross domestic product, against the initial prediction of 3.5 %.
The budget exercise 2021 has thus put a natural strain on the government. The preparation of the 2021 budget will need to take stock of the impact of the COVID 19 crisis on the economy and the government’s fiscal position and evaluate the fiscal space for continued priority crisis spending and recovery measures. The budgetary exercise is a strategy setting stage that will be closely evaluated by investors. Given that pandemic is still not over, it is better to have a medium term orientation to planning. Most importantly, the government should assess its financing needs and adopt a transparent approach towards its fiscal responses as it will help gain both market as well as investor confidence. One thing that markets don’t like is unpredictability. For this, adoption of medium term oriented plan and an accountable and transparent system of implementation of such plans will infuse confidence of both market and its investors. This is because unpredictability factor is high in long term planning given the current crisis.
India needs to continue its momentum towards structural reforms. The current government’s work has so far been laudable in this regard. But the government should not let the aftermath of pandemic defocus itself from its objective. Market reforms that pushes for easy lending, more expenditure, high public deposit should be encouraged.
The budget planning thus needs to be a concerted effort to ensure that the budget is focused on revival and resurrects the growth without hurting the vulnerable class. The planning activity may adopt the following approaches:
1. Focused budget with medium term objective
2. Increased transparency of the institutions
3. Protection of vulnerable class of people through state initiated plans as well as private participation
4. Determination of priority areas such as infrastructure, health, financial markets etc
5. Special support for MSMEs in terms of easy access to finance and regulatory ease
6. Employment generation through focus on informal sectors.
ALLOWING INDUSTRIAL HOUSES TO OPEN BANKS TO TAP DOMESTIC CAPITAL TO EFFECTIVELY
In past, government has considered allowing private industrial houses into banking business. Probably, this year, government could start with allowing a few. It will be in the interest of the market that invisible hands are strengthened and newer equal opportunities are provided for new entrants. In past, government has infused large amounts of taxpayer money into the ailing public sector banks which has weakened the backbone of Indian economy. Allowing industrial houses to open banks will allow tapping into domestic capital for effective capitalisation. Government then can use its own fiscal resources in other sectors like health and education.
FOCUS ON REVIVAL AND DEVELOPMENT OF BOND MARKET
In 2020, India saw high volatility in bond market with $13.7 billion worth of outflows even as most of its Asian peers saw record inflows. While the equity market continues to see record dollar inflows but foreign investors are still exiting bond market. Given the stress in financial institutions, it is imperative that debt market, especially bond market, develops. In India, the bond market has remained underdeveloped due to extensive compliance and disclosure. For instance, due to regulatory restrain, private placement is preferred which could be made to a maximum of 50 qualified institutional buyers. Thus, despite the potential, the bond market has faced a stunted growth.
INCREASING TAX BUOYANCY
Another area where attention needs to be given increasing tax buoyancy which is an important indicator of efficiency and responsiveness of tax revenue mobilisation to GDP growth. Tax is said to be buoyant if the gross tax revenues increase more than proportionately in response to a rise in GDP figures. Experts have argued that ideally India should target at achieving target of 1.2 to 1.3. Formalisation of economy and GST has increased direct tax buoyancy. Agricultural reforms, if implemented, could have added to this. Indirect tax buoyancy increases with additional cess collected. However, the burden does hurt both rich and the poor. Thus, if the government is thinking of adding coronavirus cess, it should not become burden on the poor who have already been hit by pandemic.
REORIENTED FOCUS ON HEALTHCARE & INCREASE HEALTH EXPENDITURE
Post pandemic, most of the countries will reorient their focus on healthcare. India’s past expenditure in healthcare sector has been low. In 2018-19, India’s spending on health sector was 1.5% of GDP. European countries spend 7 to 8 % of their GDP on healthcare. India should target to increase its healthcare expenditure to at least 4 % in next 5 years. Focus should be on increased infrastructure for medical facilities. Healthcare is country’s largest sector, both in terms of revenue and employment. The healthcare market holds potential to increase to Rs. 8.6 trillion by 2022. In Union Budget 2020 -21, Rs. 35,600 crore was allocated for nutrition-related programmes and Rs. 69,000 crore outlay for the health sector that was inclusive of Rs. 6,400 crore for PMJAY in Union Budget 2020–21. Government is mulling over to increase the healthcare budget to 2.5 % by 2025 but there is no gainsay that healthcare is one of the most important sector which needs greater attention.
INCREASING INFRASTRUCTURE EXPENDITURE
Spending on infrastructure will help government come back to path of economic stability quickly. As mentioned earlier, healthcare infrastructure must develop in all parts of the country. It must be realised that in this regard, much of it is done by state governments and not the central governments. Thus, getting the money out to the states is crucial. GST compensation due to states should be disbursed timely.
Further, the upcoming Budget for 2021-2022 is a good opportunity to take forward the efforts in clean energy. Given the impetus for Atmanirbhar Bharat, greater emphasis on power can lay the foundation for long-term growth opportunities, create jobs and attract foreign investments. For this, regulatory bottlenecks need to be addressed.
FOCUS ON EMPLOYMENT GENERATION
The litmus test for all the reforms will be whether government can reduce the unemployment rate. The year 2020 was particularly bad for employment. As per CMIE data, as a result of first lockdown, over 11.3 crore people lost jobs as the entire economy went into shutdown mode. The decline in employment will lead most of the labour reforms fruitless. As an expert as pointed, India cannot have jobless growth. Hence, government needs to find means and ways to boost employment. Focus on developing infrastructure, boosting growth of MSMEs have to be part of this major plan. For job creation, government should have focused approach. It should boost labour intensive sectors and also make policy intervention to reduce layoffs. For instance, in order to ensure more labour is deployed into the work force, a temporary policy intervention could be made introducing reduced working hours for labours. This will enable more number of labours into workforce albeit at a reduced economic output per labour.
BUDGET CANNOT BE PANACEA FOR THE PANDEMIC
Troubled times call for timely troubleshoots. While stimulus packages through a combination of both fiscal and monetary action partially arrested the impact of pandemic and imparted much-needed confidence of market , there is a lot need to be done. The Budget 2021 should be used as an opportunity to provide an additional dose of economic stimulus in seeking inclusive growth. But one needs to realise that Budget 2021 cannot be panacea for the pandemic. The recovery from the aftermaths of pandemic may take more than a year but what is important is that we take the right direction and work towards it. Government should focus on continuing the momentum of structural reforms. While it may not be the best time to bringing in sweeping change till the pandemic is over, some tweaking in regulations to suit the interest market should be adopted. Further, attempt should be made to make financial market more attractive for investors. This must be adopting medium term objective and mid-term review. After all, budget 2021 will pave a way for an “Aatmanirbhar Bharat”.
This article was originally published in The Daily Guardian on January 28, 2021.