Union Budget 2021: Expand, Borrow, Spend and Grow

The Union Budget 2021-22 sets up a roadmap for spending more in the next few years without worrying about fiscal deficit and higher public debt. The government has also set a five-year long fiscal consolidation path to 4.5 per cent fiscal deficit by 2025-26. This means the government expansionary fiscal stance to support the growth will continue. The growth has been a casualty in the last few years with Covid outbreak compounding the problems. The economy is expected to rebound with 11 per cent GDP growth in 2021-22 from a contraction of 7.7 per cent in 2020-21. The GDP  plunged to 4.2 per cent in 20219-20. The growth has been on a decline from a high of 8.3 per cent in 2016-17. The assumption is that if the growth comes back even with higher debt and fiscal deficit, the higher GDP  will push up revenues and also neutralise higher fiscal deficit and also higher government borrowing because of denominator effect. The budget has also introduced a new institutional structure like DFI  and bad bank to support the industry.

Higher capital expenditure

The government has continued with higher total expenditure in 2021-22 with outlay at Rs 34.83 lakh crore. There is a marginal increase of around 1 per cent over revised estimates of 2021-21. In fact, the total expenditure increased big time by 28.44 per cent in 2020-21 as against Rs 26.86 lakh crore in 2019-20. The capital expenditure, which is a key parameter, showed a 31 per cent rise in 2020-21 at Rs 4.39 lakh crore. The capital expenditure has been proposed at Rs 5.54 lakh crore in 2021-22, which is again a 26.19 per cent rise over the revised estimates for 2020-21. The focus of capex is on infrastructure, ports, road building, which should result in  higher job generation. The focus is also on domestic market with Atmanirbhart Bharat, performance-linked incentives and mega textile parks, healthcare and rural India.

Longer fiscal consolidation path

The government has set a five year long fiscal consolidation path to 4.5 per cent fiscal deficit by 2025-26. The fiscal deficit of 9.5 per cent in 2020-21 and 6.8 per cent of GDP in 2021-22 crosses the level of global financial crisis. In fact, the fiscal deficit numbers are much above the market expectations. The fiscal deficit is pegged at 9.5% of GDP in 2020-21 and is estimated at 6.8% of GDP in 2021-22. Clearly, the government is focussing on supporting economic recovery even at the cost of higher public debt or rating action from global agencies. The government spending was very much needed to sustain economic recovery post the Covid lockdown.

The Economic survey 2021 has also said that any deviation from the path of fiscal consolidation may be short lived as the fiscal indicators rebound with recovery in the economy. The survey had called for boosting GDP growth which would be important for enabling a sustainable fiscal path in medium term.

Return of DFI model to support infra financing

The Union Budget 2021-22 has proposed setting up of a Development Finance Institution (DFI) with a capital of Rs 20,000 crore. The government has also set an ambitious lending target of Rs 5 lakh crore in the first three years. The proposed new DFI would certainly go a long way in helping infra projects, but it will definitely require more funding support from the market as it scales up.  It is not clear how the proposed DFI will get long term funds in future. Learning from the mistake of earlier DFIs, the new DFI will needs risk mitigation strategies because of credit concentration in few sectors which would put the institution at risk in view of any adverse event

Free up banks capacity by setting up a bad bank

The budget has also proposed setting up of a bad bank under the ARC (asset reconstruction company), AMC (asset management company) and AIF (alternative investment funds) model to acquire, manage and turnaround bad loans. This will free up the capacity of banks to focus on productive areas. Currently, the banks have gross NPAs of around 7 per cent which is expected to rise to 15 per cent by September this year if the situation deteriorates. The Covid disruption has already created a lot of stress in the banking system. The bad bank will go a long way in housing the assets of national importance - the power assets, roads, steel and other infrastructure assets. These assets will have value for banks in future and also the country.

But there are challenges for the government in supporting bad bank. Clearly, there is no room for using taxpayers' money for setting up a bad bank. The capital should come from private funds. There are already global distressed funds interested in India. There are also private equity players which the government should rope in.

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