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A Good budget needs strong follow-up actions

Union Budget in India is an overhyped event, a hangover from the days of license raj. Everyone looks forward to the day

budget

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  4 Feb 2021 6:17 AM GMT

Kalpajit Saikia

(The writer can be reached at

kalpajitsaikia@gmail.com)

Union Budget in India is an overhyped event, a hangover from the days of license raj. Everyone looks forward to the day with an expectation that it will change the economic destiny of the country. That's nowhere close to reality. The reactions to the Budget are also equally interesting. It is appreciated by the party in power and its supporters, criticized by the opposition and hailed by the Industry leaving the common men clueless about the event.

At the most, the Budget can demonstrate the intent of the Government in power. It shows the direction in which the ruling party wants to take the economy of the country. Country's economic future is determined by various executive actions the government takes throughout the year. In fact, the government avoids announcement of some of the tough measures in the Budget because of the attention it draws. It is important to understand that in a country like India, the Finance Minister needs to work with lot of constraints while preparing the Budget because of which "good for all" Budget doesn't simply exist.

Still, Budget is important. Firstly, it demonstrates the areas of emphasis of the government. Money allocation in the right areas is needed based on the state of the economy. The Budget helps understand that. It also acts as a broad execution plan of the government's economic vision. Secondly, it reveals the State of government finances. It is important for the citizens to understand from where and how the required finances to run the country are mobilized. Thirdly, the Budget also has an impact on the personal finance of the tax-paying citizens. Though this aspect is not so important in lot of countries where a common direct tax structure is maintained covering majority of the population, for India it's still relevant.

As usual there was lot of hype about the recent Budget. There was speculation that the government will put a lot of burden on the taxpayers to mobilize the funds required to repair the economy devastated by the pandemic. Some pundits thought that government's spending potential will be limited by the prevailing stressful fiscal situation and hence, there won't be any major initiative. But none of these happened. Instead, the government decided to go aggressive to revive the economy with some large-scale spending. The Finance Minister has done a commendable job in this tough economic environment.

This year's Budget was presented under extraordinary circumstances. With all-time low GDP figures and deficit going through the roof, the government's fiscal maneuverability was extremely limited. Despite all these constraints, the Finance Minister presented a progressive and growth-oriented Budget. If we have to name 3 good moves in the Budget, the first one will definitely be increased outlay in Infrastructure. Capital expenditure is increased by 34.5% to 5.54L crore. The highways get 1.18L crore. A lot of new projects were announced in various parts of the country. The good news is that lot of the projects are already awarded, which means there won't be any bureaucratic or land acquisition delays. This will give the required boost to the economy and create jobs.

The second good move in the Budget is increasing the spending in healthcare. The total healthcare spending is Rs.2.23Lac crore which is an increase of 137% from last year. Though this includes Rs 35,000 crore of Covid vaccination programme, the number is still significant. Revamp of healthcare infrastructure was long overdue. Hopefully, the revised estimate for Covid vaccination will be lesser than the allocated expenditure. It doesn't make sense to provide the vaccine free for the people who can afford it.

Thirdly, the pro-investment and demand generation moves of the Budget will help the economy both in the short and the long term. The long-pending disinvestment of some of the assets needs to be fast tracked. The government's realization that they have no business to be in business should be appreciated. Increase in insurance FDI from 49% to 74% is a welcome move. This will provide much needed life to the insurance sector. The vehicle scrappage policy will boost the demand in the automotive sector. This sector contributes around 7% to the country's GDP and one of the largest generators of employment. This industry has bounced back in the recent months and the scrappage policy to help it scale new heights. Another long overdue move is the formation of Asset Reconstruction Company (ARC), popularly known as bad bank. This will help clean-up balance sheets of the banks and will lead to increase in lending.

Reduction of MNREGA allocation is a welcome move. For many years MNREGA has been a source of huge inefficiency. It gave rise to corruption at the grassroots level and very few assets were created out of the programme. Without the participation of private sector, a job guarantee scheme is not going to be successful. Hopefully, this is the beginning of the end of one of the most ill-conceived welfare schemes of the previous government.

There are some steps which could have been avoided. The increase in customs duty on some items to push for self-reliance is an ineffective concept. Similarly, there are limited Budget provisions in Education. Also, the proposal of more dividend from the RBI will create a lot of controversy. But no Budget can satisfy everyone.

The biggest question is where the money for these huge spending will come from. The current fiscal deficit figure is whopping 9.5% and the government is targeting to bring it down to 6.8% next year. It's a tightrope walk and there is no scope of any deviation from the government's plan of fund mobilization. The government is expecting an increase of 16.7% in gross tax receipts in 2021-22. This is a tall order which requires nominal GDP growth of 14.4%. Any slip on this will lead to a mess in managing the finances. The other source on which the government is relying heavily on is proceeds from disinvestment. The government is projecting Rs.1.75L crore from the disinvestment of some assets. Any deviation from this number will have a huge impact on the plan. Last year's estimate from disinvestment was Rs.2.1L crore which was later revised to Rs. 32000 Crore. Though this revision was mainly due to the pandemic, the government will have to be extremely aggressive in their plan this year.

Dr. Manmohan Singh once famously said "Money doesn't grow in trees". Though he was criticized for making this statement, this is a fundamental economic principle. For all the good initiatives announced in the Budget, effective steps need to be taken to mobilize the funds. A good Budget needs strong follow-up actions. The Finance Minister has done a good job with the Budget this year. It's all about execution now.

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