Buget 2021-22 – Not A ‘Never Before’ Budget

The budget for the year 2021-22, presented in the Parliament today, wasn’t quite the ‘never before’ budget as stated by the Finance Minister a few days back. To qualify for that, the minister should have found innovative ways to raise resources or ways to reduce expenditure while managing the same outcome. Or even, any path-breaking initiative to comprehensively monitor, review and audit all major government schemes and progressively reduce allocation on ineffective schemes. Yet, the budget has soothed nerves by not imposing any additional tax or Covid cess which gets reflected in the stock market movement. Here is a look at some of the highlights.

The budget, presented in the backdrop of the pandemic, made sure not to upset the apple cart as the economic recovery is still  fragile and increased its own borrowings to meet the economic needs. (In retrospect, the writing was on the wall as the Economic Survey had advocated a strong government spending, funded through debt. So much so that it even called for ignoring the ratings given by credit rating agencies).

The broad theme of the budget, as mentioned by FM, are – i) Health & Wellbeing ii) Physical & Financial Capital and Infrastructure iii) Inclusive Development for Aspirational India iv) Reinvigorating Human Capital v) Innovation and R&D and vi) Minimum Government and Maximum Governance. Looking closely, other than healthcare, education, rural & agriculture, highlights of the budget relate to 1) financial sector reforms led by DFI (development finance institution), ARC (Asset Reconstruction Company) and initiative for corporate bond market 2) focus on manufacturing including textiles, a labour-intensive industry and 3) easing the compliance burden, reduce litigation and continuing the efforts to build trust-led relationship between the state and individuals while coming down heavily on economic offenders.

An important highlight of the budget was FM’s detailed note on amount spent on agriculture, especially in the backdrop of farmers’ agitation. As per FM, total amount paid to farmers for procurement of wheat, paddy, pulses and cotton would be Rs 2.8 lakh crore during FY21, up from just about Rs 1 lakh crore in FY14. Total number of farmers benefitting from this would be 43.4 lakh for wheat and 1.5 crore for paddy. This implies average payment of over Rs 2 lakh to each wheat farmer and Rs 1.1 lakh to each paddy farmer. If that is so, why is there so much of distress? The reason is not hard to find. Major part of this money goes to large farmers with access to government procurement agencies etc. The dichotomy calls for overhaul in procurement mechanism whereby government separates large farmers from small & medium farmers, much like the corporate sector and makes procurement, provides other incentives only to small & medium ones.

The other highlight was the sharp increase in outlay for Health & wellbeing at Rs 2.2 lakh crore, up from Rs 94,000 crore in 2020-21. While there is nothing wrong with the outlay, it is essential to establish a fool-proof monitoring mechanism, even a procedure for grass-root level audit to ascertain the effective utilization and efficacy of the outlay.

The efforts to overhaul the custom duty structure was another highlight of the budget with elimination of 80 outdated exemptions done last year. The exemptions, willy-nilly, distort the duty structure by making taxes on raw material higher than that on finished goods, leading to inverted duty structure. FM proposed to review 400 more such exemptions and put in place a revised duty structure by Oct’21, free of distortions. Custom duty has also been increased for a large number of items to encourage domestic manufacturing. Interestingly, duty has been reduced for steel imports to counter the sharp increase in domestic prices. It may be noted that steel industry was facing unprecedented stress around 2015 and had lobbied with the government for imposition of these duties. Another far-reaching announcement within this was introduction of a clause that all new exemptions, henceforth, would be effective only for two years, dis-allowing industries from undue benefits.

For the financial sector, FM has proposed formation of an Asset Reconstruction Company (ARC) and an Asset Management Company which would take over the existing stressed debt, manage and dispose-off the assets to potential investors. This would take-off the burden of NPAs from banks’ back and also, recover a good part of value for the banks. FM has also proposed to set up a Development Financial Institution (DFI), with equity of Rs 20,000 crore, to meet the long-term financing needs of infrastructure sector. It may be noted that funds available with banks are shorter-term in nature and infrastructure financing by them leads to asset-liability mismatch for them. The DFI is targeted to provide financing of at least Rs 5 lakh crores in three years’ time.

Governments expenditure for the current year is projected to rise sharply from Rs 30.4 lakh crore to Rs 34.5 lakh crore. With equally sharp decline in revenue, total deficit is projected to reach Rs 18.5 lakh crore, up from budgeted estimates of less than Rs 8 lakh crore. For 2021-22, FM has projected Rs 34.8 lakh crore of spending with deficit of Rs 15.1 lakh crore; lower than FY21 but still significantly higher than FY20 of Rs 9.3 lakh crore. (More on the figures, in later articles)

Image Source- Doordarshan

2 thoughts on “Buget 2021-22 – Not A ‘Never Before’ Budget”

  1. I don’t understand how displacing the bad loans to ARC will solve the issue. Do they have additional powers that current banks can’t capitalize on ?

    1. Good point.. It won’t solve the issue but what it will do is shift the problem from someone who is not equipped to handle it to somoene who would be competent to manage it. Plus it will get these NPA out of the balance sheet of banks which would look cleaner and help banks work without any baggage.
      The ARC and asset management co (AMC), would aggregate NPAs from all banks and is expected to be more equipped to manage these assets and subsequently, sell it off.. Hope that makes it clearer..

Leave a Reply

Your email address will not be published. Required fields are marked *