There is more to Budget 2021 than coping with the current crisis. The Narendra Modi government seems to have taken a fuller view of the public finance picture and expressed its intent to change the course in three ways — restoring integrity and transparency in budget management, improving the composition of government expenditure, and redefining the role of government.
Getting from intent to implementation will test the Modi government’s will and capabilities, but as a statement of intent, Budget 2021 provides a lot of information.
Cleaning up the books
Since 2017-18, a significant part of the expenditure on food subsidy, Pradhan Mantri Krishi Sinchai Yojana, Pradhan Mantri Awas Yojana, Swachh Bharat Mission, etc. was being incurred by public sector enterprises by borrowing on their own books, and the government did not show this part of the expenditure on its Budget. Adding to this opacity, the National Small Savings Fund (NSSF) was made to lend to public enterprises for some of this off-budget expenditure.
The revised estimate for the food subsidy bill in 2020-21 suggests that the government is making a large grant to the Food Corporation of India (FCI) — more than the expected subsidy bill for the year. This amount may be used to discharge the debt the FCI had taken to pay for food subsidies in previous years. A similar clean-up seems to be happening for fertiliser subsidy. This Budget also shows no further extra-budgetary resources to be used for schemes in 2021-22. It seems that the NSSF lending to public enterprises is also being discontinued, and it will only lend to central and state governments, as it used to do earlier.
While this clean-up is good, it makes the interpretation of Budget 2021 numbers more complicated. The off-budget expenditure from previous years being brought on the Union Budget has already been incurred by public enterprises. But doing so makes the expenditure increase in 2020-21 look much larger than it is, and the expenditure increase for 2021-22 much smaller.
Fiscal deficit in 2019-20 was 4.6 per cent of GDP, and the estimated fiscal deficit for 2020-21 is 9.5 per cent of GDP. From this additional deficit of 4.9 per cent of GDP, only about 0.4 per cent of GDP is because of the shortfall in non-debt receipts, and the remaining because of higher expenditure. The revised estimate of expenditure for 2020-21 includes the impact of bringing previous years’ off-budget expenditure on the budget. The exact estimate is not available, but my calculations based on data from the Budget documents suggest this may account for about 1.5 per cent of GDP in deficit. So, the additional expenditure may be around 3 per cent of GDP. From this, about 0.6 per cent of GDP is additional capital expenditure, and the remaining is additional revenue expenditure.
The main caveat here is that there is some expenditure from off-budget expenditure in 2019-20 and 2020-21 that is not being accounted for in this year-on-year comparison. Although complete data is not available, my rough estimate of the net impact of this is about 0.5 per cent of GDP, which would place the net actual increase in expenditure in 2020-21 at 2.5 per cent of GDP.
In 2021-22, the deficit is budgeted to fall to 6.8 per cent of GDP. This implies a fiscal consolidation of 2.7 per cent of GDP between 2020-21 and 2021-22, but since the non-debt receipts are budgeted to rise by 0.6 per cent of GDP, and the 2020-21 deficit includes the adjustment for off-budget borrowing to the tune of at least 1.5 per cent of GDP, the actual fiscal consolidation on expenditure side is quite small — about 0.6 per cent of GDP. This is not unreasonable as the automatic stabilisers such as employment guarantee and enhanced relief measures may be tapered off in 2021-22. The government will be supporting the economy by spending even in 2021-22.
The decision to amend and not suspend the Fiscal Responsibility and Budget Management (FRBM) Act shows some intent to have a guiding framework for fiscal management in the medium-term. The Modi government could have cited the excuse of the current economic crisis to remove the limited fetters of this law. While the law is not a realistic check on the government’s fiscal decisions, it at least provides some information about its medium-term intent.
Shift towards capital expenditure
Since the economic slowdown began in 2017-18, the share of capital expenditure in the government’s total expenditure was falling, even though the growth of total government expenditure (off-budget and on-budget) was robust. The focus was on revenue expenditure. In 2019, the Modi government tried corporate tax cuts as well.
This Budget shows an intent to focus more on capital expenditure — a shift from one component of demand (consumption) to another (capital formation). The shift in 2020-21 is small — the share of capital expenditure was increased from 12.5 per cent of total expenditure in 2019-20 to 12.7 per cent in 2020-21 (revised estimate). Much fiscal space this year was taken by adjustments for off-budget expenditure, for relief measures and automatic stabilisers. But for 2021-22, capital expenditure is budgeted to get 15.9 per cent share.
In 2019-20, the central government’s capital expenditure was 1.65 per cent of GDP. In 2020-21, the revised estimate pegs it at 2.25 per cent of GDP — the highest since 2008-09 — and is budgeted to rise to 2.49 per cent of GDP in 2021-22. If implemented properly, this is a sound strategy. Fiscal multipliers for capital expenditure are typically much larger than those for revenue expenditure, and if this strategy is implemented well, it could boost economic growth.
Redefining the role of govt
In her Budget speech, Finance Minister Nirmala Sitharaman expressed an intent to change the profile of asset ownership of the government. She said that the existing infrastructure assets will be monetised across sectors such as road and highways, railways, power transmission, airports. She also reiterated the intent to privatise some of the public sector enterprises, and significantly, added two public sector banks and one general insurance company to the list. It is symbolically significant that Sitharaman used the word “privatisation”, instead of “strategic disinvestment”. The proceeds from all these would be used to make new investments. If this agenda is implemented, we could see a major shift in the profile of assets owned by the government — more greenfield projects, and fewer operational assets and public sector enterprises.
Simply putting the assets up for sale would not work. Many institutional and policy problems need to be solved. Otherwise, the assets may be sold at much lower prices to reflect the higher risk perception, or may not be sold at all. The success of this public finance strategy will depend on institutional and policy reforms in four domains — ministries and departments implementing monetisation and privatisation, infrastructure regulation, financial regulation, and regulation of capital flows.
In 2016, the Modi government expressed its intent to privatise a number of public sector enterprises. In these five years, not even one transaction has happened even though the Cabinet has approved many public sector enterprises for privatisation. Every strategic disinvestment has involved selling one public sector firm to another. It would be worth understanding why this is so.
Further, a different regulatory framework is required to facilitate large-scale entry of private players in operating infrastructure assets. Private firms may look for independent regulators that are not beholden to the ministries that own competing infrastructure assets. In railways, for instance, there is a longstanding recommendation to establish an independent regulator. Such institutional reforms must precede or at least accompany efforts to monetise the assets at large scale.
Many financial sector reforms are also implied by this strategy. Getting large-scale domestic and international capital into the infrastructure sector requires well-functioning debt markets, currency markets and markets for risk management instruments. Similarly, privatisation of public sector banks is not likely to work unless there is a proper mechanism for resolution of failed banks.
Given that the government is likely to mop up most of the financial savings, and the Indian economy will need more capital to come from abroad, perhaps there will be a stronger impulse for further opening of the capital account. The decision to allow 74 per cent foreign direct investment (FDI) in insurance companies is an important symbolic step in this direction.
Budget 2021 seems to be continuing the trend of fiscal centralisation. Since cesses and surcharges will remain high, states’ share in the Centre’s gross tax revenues is budgeted to be just 30 per cent — well below what it was even in 2018-19 (it was 36.6 percent). As states’ fiscal situation is likely to remain constrained, this could lead to serious strain on Centre-state relations and the states may be forced to make very difficult fiscal decisions, perhaps even cutting important expenditure.
Ideas like establishing a development financial institution or an asset reconstruction company may sound good in theory but the practice in India has shown that it is very difficult to make them work in our context. All the development financial institutions failed in the 1990s or were converted into banks. The Modi government will need to think about how it could be done differently this time.
Similarly, the idea of creating a government-backed asset reconstruction company to take over bad loans from public sector banks creates considerable incentives’ problems for all involved — bankers, management of the company, the regulator, and the government. Since it will be just one government-backed agency, there will be no market to do price discovery for bad loans. How will this company have better incentives than the public sector banks?
Finally, the Achilles heel of Budget 2021 could be the lack of proper consideration for the brewing financial crisis. In its financial stability report, the Reserve Bank of India (RBI) has projected that, in the baseline scenario, the gross non-performing assets of public sector banks may rise from 9.7 per cent in September 2020 to 16.2 per cent in September 2021. The modest budgetary commitment of Rs 20,000 crore towards bank recapitalisation is not likely to cover even a small part of the requirement. Unless the Modi government comes up with some out-of-the-box solution, the demand for recapitalisation of banks or capitalisation of the proposed asset reconstruction company could derail its fiscal plans for the year.
No budget can make everyone happy. Overall, there are many good things to be said about Budget 2021. But the key lies in implementation. If implemented, this could be a turning point in the government’s approach towards the economy.
The author is a Fellow at Carnegie India. Views are personal.
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