Moderate your expectations from the Budget: Financial Express 20th Jan 2021

 

Union Budget 2021 India: While sectors may want more from the government in terms of policies, there have already been myriad policy announcements since May 2020 for various sectors and hence it would not be realistic to expect more on February 1, 2021

Indian Union Budget 2021-22: The announcement of any Union Budget follows a familiar pattern. There are signals from the concerned ministry that something big is coming. Industry is rife with optimism that there will be groundbreaking measures. Individuals expect that there will be benefits for them in terms of tax cuts. But once the Budget is presented, there is general dissatisfaction, and the more politically-proper response is that it was a pragmatic one.

The hype is understandable because there is reason to be optimistic about expectations, especially under the current circumstances as the lockdown has caused considerable stress to everyone. But one should realise that there are limitations of any Budget because of three reasons. First, it is merely a statement of account of the government, and hence is a futuristic profit and loss account. The main task is to balance expenditures with revenue, and judiciously plan the borrowing programme. Second, the main juice of a Budget, which used to be the tax rates, is now outside the purview because of the GST regime. These rates were changed often in the pre-GST regime, but are now more or less fixed. There is discretionary power to increase excise duties on sin goods, but there has never been an instance of these being reduced. More often, these are raised during the course of the year when the need arises. Third, while sectors may want more from the government in terms of policies, there have already been myriad policy announcements since May for various sectors and hence it would not be realistic to expect more on February 1, 2021.

There are also other practical issues that we need to remember. The government has to move along a fiscal consolidation path and the liberty that was there in FY21 has not, in a way, leveraged through extravagant expenditures, as was done in the West. For 2020, it has been accepted that the world would operate on high fiscal deficits and these numbers would not have mattered when the multilateral agencies viewed them. But with recovery on the anvil at least in statistical terms in 2021, running a high fiscal deficit will not be palatable. A glide path, hence, has to be defined for sure. And the pace of the trajectory would be an area of interest.

Given this limitation, what can the government really do? A normal suggestion is to cut taxes. Corporate tax rates have already been cut, and there is less scope for reducing these further. Individual tax rates can be cut, but this class is a fixed income source for the government, and while there can be some space given to individuals below the Rs 5 lakh bracket, any concession in the higher levels of income can be ruled out. Therefore, providing a consumption boost by increasing disposable incomes of households can be ruled out. Any tax cuts at the lower level will be more of tokenism. Even last year, creating an alternative scale for choosing taxes was probably less meaningful and did not really benefit too many people. The government could, on the contrary, opt for taxing the higher income levels with a higher rate, with a Covid-19 cess being brought in. This will militate against consumption as it is the higher income level people who have the spending power.

The other big issue that is up for discussion is disinvestment. It has been observed that, conventionally, the disinvestment amount that is plugged into the Budget document is a balancing number to match income and expenditure after fixing the fiscal deficit. If one were serious about this exercise, ideally the plan for disinvesting LIC, BPCL, Air India or Concor should have already been in place even before the announcement was made with the exercise starting from April 1. But this is never the case, and even nine months through the year, the ministry is still not sure of the way forward. Hopefully, the disinvestment department would have plans in place for such sales as these companies have been on the discussion board for a fairly long time. Even the companies being spoken about have not really changed, and hence the pros and cons should be well known.

This really leaves the income side being fairly predictable, with little room for tinkering with numbers.

How about expenditure? The year 2021-22 will be the one where concentration has to be on the vaccination drive. If the entire population of 130 crore were to be given two doses of the vaccine by the central government free of cost, the expenditure (at Rs 400 per set of two doses) will be Rs 52,000 crore. The Centre has already spoken of states chipping in, as well as leaving it to the private sector to cater to those who come under the non-essential categories. Such an expenditure outlay can limit the scope of increasing other expenditure. In fact, intuitively, the outlays made in this Budget will tell us about what needs to be filled by the states, with the balance being left to the people to buy in the open market.

A tough call has to be taken on whether or not the relief programmes, which include the MGNREGA, free food, cash transfers for farmers, etc, have to be continued at the same level or have to be scaled back. It may be recollected that the PM-Kisan cash transfer scheme came in just before the 2019 elections and will be hard to roll back. Even in the case of the MGNREGA, the government has to walk the tightrope of persevering with the Rs 1 lakh crore mark, which has been done this year for another year. While the migrants have started returning in some sectors, the services segment is still closed. It would be necessary to continue providing such support. The same holds for subsidies where the government has to carefully plan any cutback as it can send the poor back to distressed times.

Therefore, the essential expenditures which have to be retained for a longer time cannot be compromised much this year, which, in a way, puts some constraints on the Budget. There is a clamour for higher capex, which currently is of the order of Rs 4.12 lakh crore (with additional announcements of Rs 25,000 crore being made during the year). Of this, around Rs 1.12 lakh crore was for defence, which means that around Rs 3 lakh crore in the Budget was for non-defence. The scope for increasing these numbers substantially is quite limited, and hence not more than 10% increase is realistically possible given the tight constraints.

The challenge really for the finance minister is to balance all these pressures, starting with building the path to fiscal consolidation. Therefore, it does appear that expectations from the Budget should be moderated and the success of any such exercise will hinge on presenting numbers that look practical rather than overstating revenues to present aggressive spending which cannot be fulfilled. The low taxable base will put reins on the tax revenue that can be generated, while the compulsions to persevere with various relief schemes will be a major consideration. Future growth has to be driven by private investment and consumption, with the government supporting through adequate incentives in a proactive manner, which has been witnessed all through the year. Budgetary numbers have their limitations.