Budget 2021: A building-block budget

Thrust on infrastructure

Thus, the real thrust of the Union Budget 2021 is on increasing capital expenditure, focused on expanding physical infrastructure in line with the already envisaged National Infrastructure Pipeline (NIP). Increasing capital expenditure is desirable since it has high growth and employment multipliers.

The budgeted increase in revenue expenditure in 2020-21 may include an accounting adjustment by bringing on Budget, the subsidies earlier given to the Food Corporation of India through the National Small Savings Fund (NSSF). This is why in 2020-21 (RE), the estimated food subsidy shoots up to ₹4,22,618 crore from ₹1,08,688 crore in 2019-20. It falls again to ₹2,42,836 crore in 2021-22 (BE). While this is a welcome move in the interest of transparency, it may not reflect any actual substantive increase in government’s revenue expenditures.

The emphasis on capital expenditure has enabled the government to increase the capital expenditure relative to GDP from 1.6 % in 2019-20 to 2.3% in 2020-21 (RE) and further to 2.5% in 2021-22 (BE). However, there is no significant improvement in the quality of fiscal deficit as measured by the share of revenue deficit in fiscal deficit which has deteriorated from 70% in 2018-19 to nearly 79% in 2020-21 (RE) and close to 75% in 2021-22 (BE).

For financing the proposed increase in capital expenditure, major initiatives are being undertaken for monetizing government and public sector owned assets and reinvigorating the disinvestment program. For asset monetization, a National Monetization Pipeline is being launched. A massive increase in disinvestment receipts has also been budgeted, raising its level to ₹1.75 lakh crore in 2021-22 from ₹32,000 crore in 2020-21 (RE), implying an increase of 447%. While no significant tax revenue changes have not been introduced, reliance has been based on normal GDP growth and buoyancy assumptions.

Realizing an assumed nominal GDP growth of 14.4% and a buoyancy of 1.2, implying a growth of 16.7 % in Centre’s gross tax revenues, would be key to maintaining a fiscal deficit-to-GDP ratio of 6.8% in 2021-22. Slippage in these parameters may push up the Centre’s fiscal deficit above 7% of GDP. Both growth and tax buoyancy are contingent upon economic conditions remaining unaffected by a second round of Covid-19 which is being faced by many countries.

Based on the recommendations of the Fifteenth Finance Commission, the fiscal consolidation paths of the central and State governments have been revised. In the case of the central government, the center’s fiscal deficit-to-GDP ratio is being targeted to be reduced from a level of 9.5% in 2020-21 (RE) to 4.5% in 2025-26 in graduated steps. For the state governments, it is being targeted to be reduced to 3% of GDP by 2023-24. The Commission has proposed the setting up of a high-powered intergovernmental group to examine the debt and deficit sustainability framework and amend the existing FRBM Act accordingly. One of the key issues that such a body may be required to address is to consider whether the fiscal consolidation roadmap should be asymmetric between the central and state governments. With the central government being allowed to borrow more than the state governments up to 2025-26, such an asymmetry is already being implemented through Union Budget 2021.

 (This article is first appeared in Hindu Business Line on 2 February 2021.)