The Union Budget presented in the wake of the pandemic led economic contraction lays out many proposals to strengthen the current V shaped recovery and sets India on the path to high growth.
We believe that the Budget has met the twin challenges of boosting growth while laying down a path to fiscal consolidation. It prioritises growth in the immediate term while taking a medium-term view of fiscal consolidation. It has also announced some path-breaking reforms.
With the overall expenditure at INR 34.83 lakh crore this year, the quality of the spending is moving in the right direction as more money is being put into productive capital expenditure. Capital expenditure is slated to increase by a significant 37 per cent over last year. As per RBI, capital expenditure by the central government has a multiplier effect of 2.45 in the year the expenditure is incurred and 3.14 in the succeeding year. Therefore, higher government capital expenditure will boost demand and have a significant impact on growth.
The government must focus on implementing the disinvestment and privatisation programme to generate revenues. The target of raising Rs 1,75,000 crore through this mode is a realistic one, which the government must strive to achieve. Asset monetisation has also received mention in the Finance Minister’s speech. There is high potential for raising resources by finding buyers for the government’s assets such as toll roads and surplus land and this needs to be realised. State governments also need to follow a similar policy to raise resources.
On the fiscal front, the fiscal deficit for the Union Government is targeted at a realistic 6.8 per cent next year from 9.5 per cent this year. A four-year time frame is set out for reaching a deficit of less than 4.5 per cent, setting out a clear roadmap for a prudent level.
Infrastructure building has one of the highest multiplier effects on the economy. The government must ensure that projects are implemented so that the construction activity generates much-needed employment. Setting up of a Development Finance Institution for infrastructure will help in execution of the INR 111 lakh crore National Infrastructure Pipeline over the next few years. This will boost demand creation and will also improve the overall productivity of the economy and ease of living.
The pandemic has underscored the need for strengthening healthcare infrastructure. A whopping increase of 137 per cent in the health and well being budget, to INR 2.23 lakh crore,will help address these. The new PM Atmanirbhar SwasthBharat Yojana with a budget allocation of INR 64,180 crore, will develop capacities of primary, secondary, and tertiary care centres. It will also augment critical care hospital facilities, emergency operation centres, public health labs etc.
Private investments have been in a slowdown mode. CII had suggested ensuring a stable tax regime and contractual sanctity for encouraging investments. With no major tax proposals, the budget has ensured continuity in the tax regime. Reduction in time limits for re-opening of assessments and faceless Income Tax Appellate Tribunal are moves towards simplification and transparency. The proposed conciliation mechanism and mandating its use for quick resolution of contractual disputes is a confidence building measure for investors.
In addition to boosting demand and private investments, the budget reiterates government’s resolve to continue with reforms. The move to privatise two public sector banks is a bold one and paves the way for the much-awaited banking sector reforms. High levels of Non-Performing Assets have been a dampener on the recovery in bank credit. The proposed Asset Reconstruction Company and Asset Management Company will allow consolidation of NPAs into one entity, cleaning up bank’s balance sheets and encouraging them to lend. RBI’s recent paper, Asset Quality and Credit Channel of Monetary Policy Transmission in India, identifies high NPAs as one of the reasons for slowdown in credit growth.
The policy for strategic disinvestment of public sector enterprises and initiatives towards aggressive monetisation are welcome moves.
CII is confident that the reform process will continue beyond the budget. Going forward, private investments will be key for returning to high growth. An early implementation of the recently announced Production Linked Incentive Scheme will boost manufacturing investments. PLIs, by encouraging economies of scale will make manufacturing in India globally competitive, paving the way for its integration with the Global Value Chains.
Some of the other initiatives that will help bring back investor animal spirits include further decriminalisation of business laws using compounding of offences and higher fines and penalties to nurture the risk-taking abilities of Indian entrepreneurs and reducing costs of doing business through power reforms and building of logistics infrastructure and simplifying regulations.
Overall, this is a seminal budget that infuses confidence about the strategic navigation of the economy.