When the economy is still struggling with consequences of Covid-19, fiscal support for vaccination and healthcare is the most important fiscal stimulus. The budgetary allocation for the health sector is impressive Rs 2.84 lakh crore, a raise of 137%. Out of this Rs 35,000 crore is earmarked for Covid-19 vaccines. An expeditious vaccination drive will help overcome fear that is holding back revival hospitality, tourism and formal retail sectors. Revival of these sectors will restore employment to millions of unemployed due to the pandemic.
Similarly, budgetary allocation for capital expenditure has been increased to Rs 5.54 lakh crore (about 2.5 % of GDP) – an impressive increase of 34.5% compared to this fiscal year. The budget provides a leg up to the national infrastructure pipeline by providing Rs 1.10 lakh crore for expansion of Railways and Rs 1.18 road networks in the country. Allocation for rural infrastructure fund has been increased to Rs 40,000 crore.
To mobilise the private sector money, the finance Minister proposes to set up a Rs 20,000 crore Development Finance Institution (DFI) with a view to mobilise up to Rs 5 lakh crore to help financing of projects in the capital-starved infrastructure sector. To help manage non-performing assets of public sector banks, the finance minister has announced setting up of an Asset Reconstruction and Management Company, a version of ‘bad bank’. Besides, Rs 20,000 crore has been allocated for recapitalisation of government banks. To facilitate foreign direct investment (FDI), the budget proposes to raise the FDI limit in the insurance sector to 74% from existing 49%.
Overall, the budget focuses on job creation and pump priming the economy through budgetary support for infrastructure. This along with direct income support to the poor are going to be critical for economic revival and sustenance of the growth rate.
The question, however, is where will the government get the funds required by various schemes announced in the budget?
The major source of revenue for the government are income and corporate taxes along with the GST and custom duties. The finance minister has not provided much details about the custom, levies and other duties, except the introduction of the agri-infra cess on diesel and petrol without increasing the cost to the consumer. The income and corporate taxes have been left unchanged. Besides, the FM has assured steps to ease the cost of compliance for taxpayers. No changes in the existing direct taxes have been received with a sigh of relief by many in the private sector who were fearing a Covid cess or wealth tax. This coupled with a boost for infrastructure has been received by the equity markets with a sense of joy. But in view of the current economic contraction, no increase in taxes also means that taxes revenue cannot be expected to increase enough to provide the additional funds needed to fund the ambitious investment targets.
The difference between total expected revenue and total expected expenditure of the government is the fiscal deficit. Sitharaman has pegged the fiscal deficit for FY22 at 6.8% of GDP. For the current FY21, the fiscal deficit at 9.5% of GDP. The government is hoping to meet fiscal deficit for FY 22 by monetisation of assets, a fund-raising route for the government through leasing out of infrastructure projects like roads, railways lines and airports and selling of land and other assets owned by the government.
In addition, the government is aiming to raise funds by reducing its ownership share (dis-investment) in public sector companies. The FM has announced that the government plans to privatise 2 public sector banks and one general insurance company in FY22, adding that it plans to complete the divestments of BPCL, CONCOR and SCI in addition to the long-awaited divestment from LIC IPO.
“While the Centre is hoping to get Rs 1.75 lakh crore FY 2021-22
from dis-investment, the budget does not provide an estimate for money to be raised through monetisation assets. ” Going by the experience of the last several years with monetisation and disinvestment, the most of the fiscal deficit will have been met by market borrowing.
It seems like the fiscal deficit for FY22 is going to be significantly higher than the budgetary estimate of 6.8% of GDP. So, the government may end up borrowing as much 9 lakh crore from the market. Already the yield on government securities has gone up, indicating that the financial market expects the cost of borrowing to increase.
Good things is that the government expenditure is well targeted at infrastructure and other growth boosting activities. As a high growth rate acts as a stabilising force for keeping debt-GDP ratio in check. Everything considered, the high fiscal deficit will be worth it. It is comforting to see that the government seems to be taking a relaxed view of the fiscal deficit.
(The author is the professor of Delhi School of Economics)