Budget pins hopes on financial sector changes to boost infrastructure investments

Finance minister Nirmala Sitharaman’s third Budget marks a shift in the economic stance of the NDA government. Designed in the backdrop of a pandemic induced contraction in national economic output, it marks a discernible shift towards experimenting with measures to boost economic growth through a push to build infrastructure. Budget details signal that the government expects to move out of crisis mode the next financial year by reallocating expenditure from emergency measures such as food relief to other priorities. In terms of ideological signalling, there’s a discernible shift towards privatisation and monetisation of assets to boost income. It’s a Budget with promise. But its impact will be influenced by the details, in particular how it fleshes out ideas to fund infrastructure development.

The Budget’s financial sector changes are linked to its aspirations on infrastructure development. The most significant change is the switch back to a development financial institution model backed by Rs 20,000 crore as government equity to catalyse infrastructure funding. The experience of relying on banks to do it has been disappointing. Banks are not yet out in the clear. Another important proposal is the announcement that the government will establish the equivalent of a ‘bad bank’ to handle bad loans on bank books. Both these moves hold promise. But everything hinges on the design of the institutions and attendant incentive structure. A related challenge will be staffing both these institutions with adequately skilled people. Design of other structures will play an equally important role in other infrastructure proposals. The Budget pins its hopes on the government attracting private finance in areas such as public bus transport services and the 8,500 km of road projects to be awarded in 2021-22. Budgets in recent times have been built on the same foundation, but struggled to attract enough private investment. Therefore, details fleshing out the key ideas will be key.

The Budget math is interesting. The total expenditure for 2021-22 is expected to be Rs 34.83 lakh crore, marginally higher than the Rs 34.50 lakh crore that the FM said will be spent in the current financial year after the stimulus packages. The highlight of next year’s spending will be a sharp 43% reduction in subsidies to Rs 3.69 lakh crore. The reduction is on account of a large roll back of the food subsidy bill which expanded hugely after the lockdown was imposed. The money has been reallocated to a one-time expenditure on vaccination, Jal Jeevan Mission and a new phase of the programme to enhance nutrition. The efficacy of many of these programmes will depend on the states who handle the last mile. The current Budget marks the start of the 15th Finance Commission recommendations which have created space for the Centre to create a non-lapsable fund for acquisition of defence equipment. This is a far-reaching recommendation, with its impact spread over time.

The other highlight of the spending programme is that the government plans to enhance budgetary support for capital expenditure in 2021-22 to Rs 5.54 lakh crore, higher by 26.19% over the revised expenditure for the current year. On the revenue side, tax receipts are expected to bounce back in 2021-22 as the nominal GDP is forecast to grow 14.4% to Rs 222.87 lakh crore. The highlight however is the expected growth in disinvestment proceeds to Rs 1.75 lakh crore from the Rs 32,000 crore expected this year. Some of the receipts will represent ongoing privatisation exercises such as Air India’s sale. But this source of revenue may be more durable because the Budget signalled a decisive change by indicating a couple of public sector banks and one general insurer may be privatised. In terms of signalling, this is significant.

Fiscal deficit for the current financial year is expected to be 9.5% of GDP, which the government aims to lower to 6.8% in 2021-22. Given the extraordinary situation, the overrun in fiscal deficit by 6 percentage points is understandable. Further, no fiscal projections have been made till 2023-24 as the Finance Commission recommendations have altered some scenarios. It’s a Budget without any big surprises on the tax front, and one that holds potential in changing infrastructure financing in India. That potential needs to be actualised in the days to come.


This piece appeared as an editorial opinion in the print edition of The Times of India.


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