Devil in the details -Budget 2021
Run up to Budget 2020–21
2020 was no ordinary year for the world as it reeled under the twin crises of a pandemic and the resultant economic shock. India, with public expenditure on health of a little over 1% of GDP and three consecutive years of declining growth rate was in a bad place even before the virus struck. The government responded by quickly locking down but the relief package announced came as too little, too late. Despite claims of amounting to about 10% of GDP, the actual fiscal cost was a little over 1%. Delay in meaningful government intervention severely impacted millions and led to a bigger humanitarian crisis-the exodus of migrant workers from urban to rural areas contributing to a rise in infections. India ended up being the worst affected country in South Asia with 111 COVID deaths per million (better than Europe and North America nonetheless)and a 7.7% contraction in output. Against this backdrop, there was a near consensus from all corners that counter-cyclical fiscal policy is the way out. The Economic Survey (ES) accordingly recommended that growth should be prioritized over fiscal consolidation to hasten the “V-shaped” recovery with increasing investments in health and infrastructure.
Budget speech highlights
Finance Ministers rarely listen to their Chief Economic Advisors, but at first glance, this budget seems to do exactly that. And I’m not just talking about quoting the Thirukkural. FM Sitharaman emphatically highlighted health and infrastructure as the two most important pillars of the budget along with inclusive development, human capital, R&D and minimum government- maximum governance. In her speech, she claimed that health expenditure would be increased by a whopping 137% while capital expenditure would be increased by 34.5%. She also announced various infrastructure projects and the intent of the government to focus on disinvestment and asset monetisation. The market responded enthusiastically as SENSEX and NIFTY closed 5% higher. After a power-packed speech of 10,500 words in about 100 minutes, the budget documents were released. And it is when one takes a closer look at these numbers, does it turn out that the budget was full of rhetoric but lacked substance (or as some call it — a jumla).
Analysis of Expenditure
Contrary to popular belief and the narrative of the government amplified dutifully by mainstream media, the overall expenditure of the government did not increase substantially during the pandemic. Nor is it going to rise in the coming year. Let’s look at the numbers for the current fiscal year. The revised estimates (RE) show a 13.4% increase than budget estimates (BE) (Table 1). However, this includes Rs. 3.07 lakh crore of additional food subsidy (Table 1)which the government properly accounted for only in the revised estimates by including borrowings by Food Corporation of India, a move nevertheless in the right direction to ensure greater transparency. So the actual expenditure this year stands at Rs. 31.4 lakh crore, which is 3.3% more than the BE.
Coming to the next year’s expenditure, the government has budgeted a 0.95% increase from the RE of FY20 (Table 1). However, most of it seems to come from an increase in interest repayment on debt. If the numbers are adjusted for these, the effective expenditure for the next fiscal decreases by 3% which is a negative fiscal stimulus (Table 1). Whatever the budget is, it is not a “spend, spend, spend” budget.
Health and Wellbeing
The FM claimed in parliament that budgetary allocations to health this year have risen by 137% (Figure 1). However, the budget documents show that healthcare spending has increased by 9% from BE of 2020–21 but decreased by 9% from the RE (Table 2). The core health expenditure of the Department of Health and Family welfare for the next fiscal as compared to the RE of 2020–21 has fallen by 9.6% (Table 2). The 137% figure comes largely from the one-time vaccination expense and a 180% increase in the amount allocated to the Department of Water and Sanitation for 2021–22 as compared to the BE of 2020–21 (Table 2). But over 83% of this allocation will be transferred to the Central Road and Infrastructure Fund which is not a health expenditure by any stretch of the imagination (Table 2). Additionally, expenditure on nutrition outlay has been cut by 27% (Figure 1).
Human capital and inclusive development
Here too, the numbers paint a bleak picture. Compared to the BE 2020–21, allocations to education and social welfare have been slashed by 6.1% (despite the approval of NEP 2020 which committed to an increase in education spending) and 10% respectively (Table 1). With the pandemic worsening existing inequalities, budget cuts in these areas might end up accelerating the same. It is worth noting that the government increased its expenditure on rural development this year by 50% against the BE. However, the government has withdrawn this fiscal boost and decreased the allocation by 10% for FY-21. The Mahatma Gandhi Rural Employment Guarantee Scheme which served as an important safety net for rural India witnessed 80% increase in its allocation this year against the BE. For FY-21, it has been decreased by 34%. This decrease is because of the government’s assumption that there will be a lesser demand under NREGS next year.
Capital Expenditure and infrastructure
Various flagship projects will be initiated this year with a special interest in poll-bound states. Along with a plan to set up a Development Finance Institution (DFI) to meet long term debt financing needs, FM declared that in the current fiscal the government had spent 0.27 lakh crore more than budgeted on Capex and the number would only increase by 34.5% in the coming year (Table 1). However, these numbers form the Gross Budgetary Support (GBS) which is just a part of the Total Capital Expenditure. The government actually spent slightly less than the budgeted amount and it is estimated to rise by 4.8% the next year (Table 1). So the claims of a sharp increase in Capex during the current year and the next are at best partially true.
Defence spending and other announcements
There was one important domain that the Finance Minister strategically failed to mention in her speech for obvious reasons- defence. With uncertainty over the situation in the border, overall defence expenditure was increased by 6.19% this year compared to BE and is expected to rise by 1.1% in the next fiscal year (Table 1). Spending on pensions has decreased while capital outlay has increased. This is perhaps an indication of the political will to modernize our defence capabilities.
Apart from these, the FM also announced various “reforms” in tax collection to increase ease of compliance- making the process technology-intensive and faceless. There were also exemptions announced for certain categories of senior citizens from filing returns. Agriculture and Infrastructure development cess will be levied on some imports and petroleum and diesel along with cuts in import and excise duties to ensure no net change in what the consumer pays. Since cess is not part of the divisible pool of revenue shared with states, this will impact their receipts. In line with the “Atma Nirbhar” theme of the year, various schemes under the name were introduced and custom duties for specific items were raised to boost “Make in India”.
Disinvestment and Liberalization
If the budget is not an aggressive spending plan as expected, what then explains the euphoria of markets and the glee of India Inc? The answer is supply-side reforms. The FDI limit for insurance has been hiked to 74% while the government has “boldly” committed to disinvesting a host of PSUs including two PSBs, Air India and BPCL. Large scale asset monetization has taken centre stage and the government plans to bring the IPO of LIC. All in all, the government expects to gain Rs. 1.75 lakh crore through disinvestment in the next fiscal as opposed to the Rs. 32 thousand crore it received this year (against a BE of Rs. 2.1 lakh crore) (Table 3). There are two main concerns with these ambitious plans. First experts are rightly concerned about the execution. Despite the spectacular performance of equity markets in the second half of 2020, the government was unable to deliver on disinvestment. The other is in regards to the formation of corporate monopolies. The 2019 airport bidding resulted in the Adani group gaining control of all 6 airports despite reservations from the Finance Ministry and Niti Aayog. India mustn’t transition from state monopolies to private monopolies as competition is a fundamental condition to ensure the success of markets.
Conclusion
In conclusion, the government has not increased its spending drastically this year. Nor does it plan to do so in the next. A major chunk of this year’s 9.5% fiscal deficit against BE of 3.5% is not due to a jump in spending but because of FCI borrowings, failure to achieve disinvestment targets and fall in revenues (Table 3). Low tax revenues are both a major fiscal constraint as well as an indication of falling demand. The burden to offset these losses then falls on the working class who suffer hikes in excise (Table 3) and pay exorbitant amounts for petrol and diesel despite a fall in global prices. This prompted many to call for a Covid tax on profits made during the pandemic since data suggests that the post lockdown recovery has been led disproportionately by corporate profits rather than wages and employment. The government’s decision not to take such steps added to the joy in the markets.
Allocations to critical sectors like health and education for 2021–22 have seen a substantial cut in nominal terms. In real terms, the fall would be steeper. The budget which was supposed to drive demand and provide a social safety net for the vulnerable in the aftermath of a historic pandemic ends up doing nothing of the sort. Instead of focusing on demand-side measures, the government has chosen to go for supply-side reforms in the expectation that it would drive growth. In the battle between Keynes and Hayek, India has picked the latter. Business leaders and a section of economists are therefore hailing the budget as visionary. Only time will tell if the gains of the stock market would “trickle-down” to the rest of the country. If history and evidence are to be believed, the answer is in the negative. As always, I choose to pin my hopes on the great Indian exceptionalism.
