The PM recently said that in 2020-21, India went through 4-5 mini-budgets. That being the case, the latest one needed to be more than an annual statement of GoI’s receipts and expenditure. Indeed, before Monday, the FM had hinted that this budget would set the tone for the next decade. Through a sparkle of reform fireflies, the budget does just that.
The budget estimate (BE) fiscal deficit GDP ratio in 2020-21 was projected to be 3.5%. Given the pandemic, this was bound to be exceeded and the revised estimate (RE) is 9.5%, higher than analyst projections. That’s because of a trait characterising GoI since May 2014: greater transparency in budget numbers. Off-budget items are incrementally being brought into budget numbers (Food Corporation of India, etc). Therefore, if one projects a BE 2021-22 fiscal deficit-GDP ratio of 6.8%, that has greater credibility than a non-transparent 4.5%.
Nor are nominal growth numbers in 2021-22 over-optimistic. A real GDP contraction of 7.7% in 2020-21 means that with that lower base, real growth in 2021-22 will be at least 10%, maybe even 11%. So, nominal growth of 15% in 2021-22 is plausible, making the budget number of 14.4% credible. Is fiscal consolidation and a reduction in fiscal deficit to 4.5% by 2025-26 doable? Anything more than an annual reduction of 0.5% would have been unlikely. So, what’s projected is credible.
Tax revenue projections aren’t fancy. Since there is an aggressive national asset monetisation pipeline (and dashboard) and a privatisation/strategic sales agenda, one shouldn’t be sceptical of the Rs 1,75,000 crore figure. With Covid, a comparison with the track record for 2020-21 is unfair. Other than disinvestment receipts, 9.5% in 2020-21 declines to 6.8% in 2021-22 primarily by containing expenditure increases. Since capital expenditure has increased, this means rationalisation of existing expenditure schemes.
Add to this the following: (1) Choice to consumers in power distribution, prepaid smart metering and feeder separation. (2) Progress towards gold exchanges. (3) Increase in FDI in insurance. (4) Decriminalisation of offences under the Companies Act and one-person companies. (5) Portability for migrant workers. (6) Simplification of tax procedures. Everyone has a wish-list, typically in the form of tax concessions. The contours of reform are, however, in the form of removal of exemptions, and this budget does this for import duties (with more rationalisation contemplated from October 2021).
Instead, the true test of any budget, especially one that sets the tone for the decade, is in what it does to push reforms — choice, competition and efficiency. The FM articulated this as six pillars. Essentially, the template is about human capital (health and education), physical infrastructure, inclusion (financial and otherwise), targeted subsidies, financial sector reforms (privatisation of PSBs, general insurance and (LIC IPO) and land (Swamitva) and labour (the portal and extension of social security) market efficiencies.
This budget should be lauded not only for what it does, but also for what it doesn’t do: (1) resists the impulse to offer tax concessions; (2) resists the temptation to impose a Covid cess or hike rates.
The Sensex is a thin slice of the capital market and no Union budget should be judged on the basis of Sensex behaviour alone. But the capital market probably recognises there is a lot of sense in this budget and little that is hidden to be discovered later. Perhaps the best metaphor is that of the faceless Income Tax Appellate Tribunal (ITAT). The more the tribunal loses face, the less the human interface, and the better the face of tax reforms, not just for tribunals but for all taxes.
Eventually, budgets will lose their hype, without yearly tax variations. That’s what 2021-22 also indicates.
Bibek Debroy is Chairman of Economic Advisory Council to the PM.