In such a situation, the pilot has three choices — wait for the storm to pass by, let the plane crash-land and prepare for the worst damages, or show nimble thinking to find the way through the storm. India, under Prime Minister Narendra Modi, chose the third option.
In May last year, at the peak of the pandemic, the PM laid down the broad contours of India’s recovery path with a visionary Aatmanirbhar Bharat (self-reliant India) plan. Nine months later, finance minister Nirmala Sitharaman’s budget for 2021-22 is a resounding exemplification of this vision.
The budget is a tutorial on economic policy-making and structural reforms. The string of mini-budgets under the Aatmanirbhar Bharat package envisioned by the PM laid the foundations for the budget this year which required the deployment of all the fiscal arsenal to win an extremely challenging war.
Emphasis on economic reforms is the hallmark of the Modi government. The number of reforms introduced in the last six years will easily outnumber reforms taken up by previous governments. India’s swift and continuous rise in global ranking of ‘ease of doing business’ bears testimony to this. The trend continues in this budget too.
The budget stands out on multiple counts. The goal of turning India into a preferred manufacturing destination through Make in India, attracting more investment in the production-linked investment sectors and Vocal for Local need robust backing and lowering logistics and transaction cost.
To this effect, the budget has set aside considerable funds for infrastructure such as roads, railways, metro railways, National Rail Plan for India – 2030, metro rails in Tier 1 and Tier 2 cities and operational management of major ports on a public-private-partnership basis.
Infrastructure has received pointed attention. A new development finance institution, called the National Bank for Financing Infrastructure and Development, will accelerate project financing. Investment in such projects has a strong positive multiplier effect.
‘Capex in 2021-22 at 2.5% of GDP’
The proposed capital expenditure of ₹5.5 lakh crore for 2021-22 amounts to 2.5% of the gross domestic product (GDP) — and 3.4% if we include allocation for capital expenditure for states and autonomous bodies.
The government’s heavy lifting for infrastructure projects will help create employment, besides pushing growth in intermediate industries such as steel and cement. The budget also addresses the issue of infrastructure financing by asset monetisation and foreign participation through infrastructure investment trusts and real estate investment trusts. The national monetisation pipeline will establish the required strategy with the national infrastructure pipeline.
The budget also makes a bold reformist statement and shows a plucky drive to push growth. A new asset reconstruction company and an asset management company will be set up to clean up non-performing assets in the banking sector. This will enhance credit flow into the corporate sector, as removing troubled assets will relieve pressure on capital for banks.
India has been one of the most attractive destinations for global investors in recent years.
This trend continued even during the pandemic as India received $28.1 billion by way of foreign direct investment (FDI) in the second quarter of 2020-21, the highest among all major global economies.
The budget has proposed an increase in the FDI limit in insurance companies to 74% from the present 49%, recognising the importance of core equity capital in the financial sector and providing a further boost to FDI inflow.
Various acts governing different segments of the financial market will be consolidated under a single Securities Markets Code, which will modernise and strengthen the financial infrastructure. The budget has proposed to create an institutional structure to address liquidity concerns in the secondary corporate bond market that has arisen due to Covid-19. Decriminalisation of LLP Act 2008, redefining small companies and easing restrictions on one-person companies, and launch of MCA21 Version 3.0 with additional modules and mechanisms for faster resolution of disputes are some of the important decisions towards removing restrictions on doing business.
Focus on Disinvestment
The Modi government strongly believes that the government’s job is not to do business but to function as a catalyst for businesses. Keeping this in mind, this budget lays down sharp guidelines for disinvestment. Central public sector enterprises (CPSEs) have been classified into strategic and non-strategic sectors. The government will move cautiously with regard to disinvestment in strategic sectors such as atomic energy, space, defence, telecommunications, power, petroleum and banking, but CPSEs in non-strategic sectors will either be privatised or closed. The new policy framework will certainly help the government meet its disinvestment targets.
In many ways, micro, small and medium enterprises (MSMEs) are the lifeblood of India’s manufacturing sector. MSMEs account for more than 30% of India’s GDP, 45% of the manufacturing sector and 25% of the employment. The budget has provided ₹15,700 crore to MSMEs, and has proposed changes like increasing duty on steel screws, plastic builder wares and prawn feed to benefit them.
Promotion of startups is one of the main highlights of the Modi government and several steps have been taken in this direction, including broadening the definition of startup, simplifying regulations, income tax exemptions and provision of a ₹10,000 crore fund through the Small Industries Development Bank of India.
In addition, Startup India Seed Fund Scheme has been set up with a corpus of ₹945 crore, aimed at providing financial assistance for proof of concept, prototype development, product trials, market entry and commercialisation. This budget has given further impetus to startups by extending eligibility for availing tax holiday and capital gains exemption till March 31, 2022.
Health Immediate Priority
The budget also identifies the immediate priority: health. It takes a holistic approach with sharp focus on strengthening three areas — preventive, curative and well-being. The budget outlay for health and well-being, at ₹2.24 lakh crore, is 137% more than the budget estimates of 2020-21. Another ₹35,000 crore has been set aside for the Covid-19 vaccination programme this year. A new centrally sponsored scheme, PM Atmanirbhar Swasth Bharat Yojana, with an outlay of about ₹64,180 crore, will develop capacities of primary, secondary and tertiary care health systems, strengthen existing national institutions and create new institutions.
Agriculture is at the core of India’s socio-economic being. Over the last six years, the Modi government has walked the talk on raising farm incomes and remains committed to the avowed goal of doubling farm incomes. In addition, the budget has something for everyone and it will continue to facilitate PM Modi’s resolve to provide housing, toilets, LPG, electricity, clean water and food security to every citizen of India.
One of the keystones of this budget is the transparency in the macro fiscal numbers. There is no rise in income tax rates. Most importantly, the budget has rationalised the fiscal deficit numbers and the off-balance sheet borrowings. Bringing in this complex piece of fiscal policy reform that has been long overdue is an extremely courageous and bold move of finance minister Nirmala Sitharaman. This budget marks an inflection point in India’s fiscal policy architecture that will be remembered for years to come. Despite the current odds, the budget creates the right policy environment for our $5 trillion GDP goal on the strong foundation of Aatmanirbhar Bharat.