Finance Minister (FM) Nirmala Sitharaman presented amid high expectations and speculations. This budget has been prepared under the shadow of Covid crisis and economic survey highlighted several issues which our economy is facing.
The budgetary allocation is directed towards reviving growth and government preferred growth over fiscal prudence. Capital expenditure has been increased by 34 per cent to Rs. 5.54 lakh crores which will give a much-needed push to infrastructure development. Expenditure on health sector was expected to be increased due to the unprecedented crisis witnessed last year and the increase in expenditure from Rs. 94,452 crores to Rs 223,846 crores (up by 137 per cent) should be used to build health infrastructure.
Agriculture and allied sector still employ more than half of the country workforce and it contributes roughly 18 per cent of the country’s Gross Value Added (GVA) at constant prices. Budgetary allocation on “Agriculture and Allied Activities” has been increased to Rs. 382,204 crores, an increase of 44 per cent as compared to the previous budget estimate. A large part of this amount has been allocated towards developing agriculture infrastructure in the field of storage & warehousing. FM showcased increased Minimum Support Prices (MSP) outlay to farmers during the NDA regime and agricultural credit target has been increased by 10 per cent to Rs. 16.5 lakh crores in the current budget. Similarly, allocation on Rural development has been increased by 18 per cent which mainly includes expenditure towards rural employment scheme MNREGA. This scheme ensured livelihood to migrant workers during lockdown and expenses increased significantly in revised estimates for 2020-21 but since workers have started coming back, current year allocation appears to be reasonable.
Fiscal deficit target is 6.5 per cent for the next fiscal and finance minister has assured that nothing is brushed under the carpet. Financial jugglery used earlier to fund food subsidy via loan route has now been taken into the books and perhaps this could be the reason behind the sharp increase in “Department of Food and Public Distribution” allocation in 2020-21 revised budget estimates. 2020-21 budget estimate of Rs. 121,078 crores have been increased to Rs. 437,517 crores in revised estimates and this is a welcome move towards transparency. Estimated non-tax revenue is lower as compared to the previous year but the sanctity of fiscal deficit target will be largely dependent on the realisation of disinvestment proceeds. Our public sector enterprises are like family’s silver and if the government wants to do away with this then first it should sale the rusted silver. It doesn’t make any sense to sell profitable PSUs while keep running loss-making ones out of the public exchequer. This kind of privatisation is “Unjust Enrichment in Disguise” where corporates will benefit at the cost of public money. Institutions like LIC have been created over decades and selling stakes in the name of reform is unwise. Nevertheless, valuation of PSUs is always a contentious issue despite increased transparency in price discovery mechanism.
The government had a tough choice in the current year and there was no other option but to resort to market borrowings. Economic survey argued that as long as our nominal growth rate is higher than the cost of borrowings, policymakers should not be worried about debt. This theory is good only in those circumstances where debt is being utilised in asset creation which remains invested and generates a consistent surplus. In our case, this is not the situation because market borrowings are targeted at Rs. 12.05 lakh crores while CAPEX is planned for Rs. 5.54 lakh crores. If we add targeted disinvestment proceeds then overall asset creation will fall short of liabilities assumed by the government. If we add interest payment of Rs. 8.4 lakh crores and CAPEX creation, then apparently it looks like borrowings are used to meet the interest obligation which of course is a legacy issue for this government. Higher fiscal deficit for the current budget is a fact but obsession with debt is bad. Mature economies are formal and thereby their ability to quickly raise the resources is better as compared to India and therefore we should not be comparing our Debt-GDP ratio with the west.
FM has stressed on consolidating various fiscal laws, development of the bond market, and FDI limit in the insurance sector has also been increased. Various offences under corporate laws are to be decriminalised and it’s good to create mutual trust between regulators and businessmen. These are good steps in the right direction. However, budgetary allocation of Rs. 20,000 crores towards recapitalisation of banks appear to be less. RBI’s financial stability report released in January 2021 has already indicated a steep increase in NPA from 7.5% in Sep’20 to 13.5% in Sep’21 in the baseline scenario and up to 14.8% in a severe stress scenario. Economic survey has also highlighted that the bad loan crisis is yet to be resolved even after Asset Quality Review (AQR) is over which was started by Raghuram Rajan. It is important here to highlight that regulatory forbearance by RBI has become a routine and therefore it is difficult to rely on the financial health of our banks on the basis of balance sheets. It raises a question mark whether this regulatory forbearance is resulting in window dressing by banks? To put into a perspective, RBI has consistently deferred global accounting practice of recognising NPAs based on Expected Credit Loss (ECL) model which may result in recognition of off-balance sheet items also. It would be interesting to see how Asset Reconstruction Companies (ARC) are going to help in handling all-pervasive NPA mess in the financial sector engulfing banks and NBFCs.
There are not too many tax proposals this year and some of the amendments are in the interest of taxpayers. Reducing time limit to 3 years for opening income escaping assessments, setting up dispute resolution mechanism, faceless appeal with ITAT etc. is a welcome step. However, monetary limit of Rs. 10 lakhs for eligibility under dispute resolution mechanism should be reconsidered and enhanced because provisions related to settlement commission are proposed to be omitted now. Obsession of taxing provident fund amount should also end because this is the only safe investment for the salaried middle class. Increasing monetary threshold for income tax audit and doing away certification of annual return under GST could be counterproductive towards tax compliance and should be reconsidered. The success of initiatives towards transparent taxation and dispute resolution is dependent on proper execution else these will have a similar fate like Vivad se Vishwas scheme where assesses are still awaiting a response from tax officials.
On an overall basis, the budgetary allocation is good in view of the pandemic hit economy which has just started picking up and the fiscal constraints which the government is facing. Perhaps this is the best budgetary allocation which we have seen in recent past. GST collection, PMI data etc. are indicating that the economy is back on track. However, the government should have considered giving some relief to the salaried middle class and Chanakya’s principles of collecting taxes like a honeybee should have been followed.
(Shshank Saurav is a Chartered Accountant and Public Policy Analyst)