Battle of the Budget

By Debasis Mallick

The Finance Minister during her budget speech this year drew inspiration from the great victory of Indian cricket team in Australia- “I can’t help but recall the joy that we as a cricket loving nation felt after the team India’s recent spectacular success in Australia.” As India emerges out of the year-long pandemic, it’s been a tall ask to present a budget for a nation of 1.3 billion people. The situation was so grim on the economic front that the country’s GDP had gone for a drastic free fall of 24% in the first quarter of 2020-21.

Noted economists Raghuram Rajan and Abhijit Banerjee were not happy with the economic package announced by the Finance Minister during the pandemic. They strongly favoured monetizing the fiscal deficit, wherein the Reserve Bank of India purchase Government debt and finance the debt by printing currency. Central Government, in turn, distribute cash to the common public to boost up demand.

The initial revival package announced by FM, unfortunately didn’t increase the Government expenditure to a significant extent. I recall the words of a great cricket commentator, Kishore Bhimani who, in one of the test matches of India with Australia when India was batting in the fourth innings fighting for a win or draw, gave his expert advice that the need of the hour was concentration in the first place, then consolidation and finally aggression to win. Perhaps Nirmala Sitharaman followed the advice of Kishore Bhimani unknowingly. She batted like Cheteshwar Pujara to begin with, but by doing so, she overlooked the contribution of shubman Gill. Gill wasn’t adventurous in the mould of Rishabh Pant, neither did he play the role of a consolidator like Pujara- but his was an approach of caution with a bit of aggression. When Nirmala sitharaman announced the revival package, she actually missed a trick by ignoring the wonderful opportunities of putting the economy back on rail through investment in the infrastructure sector of rural India.

Prime Minister Modi announced a complete lock down of the economy, but in effect the lock down was strictly implemented only in the urban sector. The rural economy continued to grow at a healthy pace of around 3% when the chips went down so badly for the manufacturing and services sector of urban India. A big push in the rural sector would have created alternative employment opportunities releasing pressure on the farm land and raising the consumption demand.

Be that as it may, the Finance Minister has finally broken down all the shackles and batted like Rishabh Pant and Washington Sundar in her union budget by nearly hitting the bull’s eye in her third attempt. The bold announcement to come out of the FRBM Act of 2003 by raising the fiscal deficit to 6.8% of GDP in 2021-22, increasing the FDI in insurance sector to 74%, privatization of Air India, BPCL, one General Insurance Company can certainly bring in resources without taking recourse to the easy way of printing currency notes. In addition, creating Asset Reconstruction Company or Bad Bank, concept of National Monetization Pipeline to monetize idle assets of PSUs & Government Department and creating Development Financial Institution for Infrastructure financing are steps in the right direction. Though these announcements may not lead to a paradigm shift in Indian economy, but this is a good beginning from a party influenced by RSS ideology which is against any decision of privatization or foreign capital infusion. These decisions coming at the backdrop of severe farm protest against the three farm bills speak volumes on the Government’s intent for a reform based growth.

However, the opposition leaders including some of the noted economists such as, West Bengal Finance Minister Amit Mitra thinks that the Government should have declared cash incentive to the lowest 25% people for a period of six months. According to Dr Mitra and kaushik Basu, professor of economics, Cornell University, the FM has done too little and too late in terms of revival of the demand in the economy. Cash incentive and not the infra push could only be the answer to the question of quick and immediate revival of sagging economy. The Indian economy is consumption based and what Covid has hit badly is the consumption which constitutes 58% of our GDP; so its recovery from the present day crisis has to be looked into an effective demand management policy.

Kaushik Basu was incidentally the Chief Economic Adviser when Indian economy faced recession due to the impact of global economic downturn of 2008 arising out of sub-prime crisis of USA. It would be interesting to see what the Government did to revive the economy during 2009-10. The situation was almost similar in 2008 and 2009 although the intensity was far less severe as compared to the precarious situation prevailing today. The Indian economy began to slow down even before the global recession hit our economy in 2008. The downward trend commenced in the first quarter of 2007-08 after reaching a GDP growth of 9.8% in the last quarter of 2006-07, a situation somewhat similar to the three quarters of pre-covid period when rate of growth of GDP started shrinking. Rate of growth declined to 6.7% in 2008-09. There was a sharp drop in export, sale of commercial vehicles, tax revenues reduced by 19%. What did the then Finance Minister Pranab Mukherjee do to create demand in the economy? He took a series of measures towards fiscal stimulus, such as, reduction of excise duty, central sales tax, and announced incentives for export. Fiscal deficit for 2008-09 was 6.2% of GDP and 6.8% in 2009-10. Pranab Mukhrjee’s budget of 2009-10 was hailed as expansionary and so is the budget of 2021-22. Budget 2008-09 saw a steep rise of expenditure by 33% over the previous year. Nirmala Sitharaman increased the expenditure in 2020-21 to Rs 34.4 trillion from Rs 26.8 trillion in 2019-20. Expenditure projected for 2021-22 is Rs 34.8 trillion which, however, is a very modest increase over revised estimate of 2020-21. Perhaps, she could have stretched a bit more. I will come to that later. More important is the paradigm shift in Sitharaman’s budget to allocate a massive dose of capital expenditure amounting to Rs 5.5 trillion in 2021-22, a rise of about 28% over the last year. The UPA Government shied away from an infra push in their economic management. According to K V Subramanian, the Chief Economic Adviser of the Modi Government, there is a multiplier effect of 2.5 in respect of infrastructure investment in India. Thus an investment of Rs 5.5 trillion will generate Rs 13.75 trillion in the economy.

Subramanian and also Vivek DebRoy, Chairman, Economic Advisory Council feel that by investing enough in the formation of capital assets will not only ensure employment generation but result in adequate return in the near future helping to push the GDP upwards. There are enough instances in Indian history to erect monuments and grandiose structure to generate employment in crisis situation. One such building is the famous Bara Imambara or bhulbhulaiya of Lucknow, an architectural masterpiece built by Nawab Asaf-ud-daula in 1780 to give employment to the people during a famine which lasted for a decade. It was a project conceived much before the modern era when the British economist John Maynard Keynes thought of state intervention to generate employment to tide over the great depression of 1930’s. Vivek Debroy, while supporting the idea to invest in infrastructure, has said that the policy is as good as teaching a person to fish instead of offering him fish, a quote ascribed to the famous Chinese philosopher Confucius.


The big budget presented is full of promises and bold initiatives- quite a bit of it was beyond our expectations leading to the equity market euphoria, which was in jitters just before the budget. Psychologically, big business houses, the ultra-rich and high net worth individuals were anticipating a higher tax burden. That the FM left them unscathed and untouched is itself a big bonanza or for that matter the budget 21-22 has done wonders in instilling a sense of confidence among the business community.

The FM has earned some brownie points no doubt, but budget 2021-22 will not be as smooth sailing as it is thought out to be. Sluggish bureaucracy, strong labour unions and an under-nourished rural economy are likely to put a dampener on the execution of various policy issues which are so sacrosanct for the efficacy of the budget. Take for example, the disinvestment target of Rs 1.75 trillion. The Government plans to privatize Air India, BPCL, IDBI and two PSBs which will bring in Rs one trillion. Rs 750 billion will be generated out of the disinvestment of a number of PSUs and IPO of LIC. Will these be achieved in a time line of 12 months? Without being skeptical about the intent of the FM, let’s see what she did on her disinvestment programme in the last two years. The FM had set a target of Rs 2.1 trillion disinvestment for 2020-21 and Rs 1.05 trillion for 2019-20. The actual achievement against this is Rs 500 billion in 2019-20 and a minuscule 320 billion rupees in 2020-21 (Estimated; actual achievement is 200 billion Rupees till December). As a matter of fact, we have never observed a sense of urgency to achieve the disinvestment target in the past. Privatization of IDBI and BPCL was planned out in 2020-21 and Air India much before that. If we continue to miss the disinvestment target by such huge margin, it would be well nigh impossible to finance the ambitious target of capital infusion without further raising the bar of fiscal deficit. Covid could be cited as an escape route to miss the target in 2020-21, but such excuses will not be tenable in 2021-22.

One more issue which the FM has grossly neglected is the investment in rural infrastructure. How much is the allocation to rural sector out of the allocated capital expenditure of 5.5 trillion Rupees? Virtually nothing. She has only increased the allocation to Rural Infrastructure Development Fund (Under NABARD) from 300 billion Rupees to 400 billion. But she hasn’t announced any new infrastructure development programme in the rural sector. Let’s remember that more than 60% of our population live in rural India. According to a statistical report presented by NDA Government in Parliament in 2019, there is a wide disparity between rural and urban per capita income in terms of Net Value added, which is Rs 98,000 for urban India and Rs 40,000 for rural areas. The media and the erudite urbanites keep debating about the accumulation of wealth in the hands of a few industrialists, but they are oblivious of the standard of living conditions in rural India. It is unfortunate that our rural population have always been considered as tailenders or B team. As a matter of fact, budget doesn’t bring them something to cheer about. An allocation of about 50% of the proposed capital outlay of the 2021-22 budget, say an amount of Rs 2.75 trillion towards development of infrastructure in the rural sector could have triggered a never seen before growth momentum in rural India. Additional capital outlay of Rs 2.75 trillion would have raised the fiscal deficit bar to 17.75 trillion Rupees which is 8% of GDP. Fiscal deficit of this order was certainly manageable with the type of multiplier effect it would have generated. With additional employment generation and increase in purchasing power, demand for the FMCG would have risen manifold, a phenomenon which would have boosted the growth of urban sector alike.

Since the Finance Minister decided against traversing the country roads this time, we have to wait one more year with the hope to get a better deal for our friends living in the countryside.

6 thoughts on “Battle of the Budget”

  1. Excellent analysis with out any bias. My view on budget is similar . However, what is the comment on budget on bad loan / NPA control . I feel , that fund generation through disinvestment depends on lot of external issues where as NPA / bad loan control is otherwise.


    1. Govt has finally given a go-ahead to create a Bad Bank. NPA is going to be a nagging issue after a year or so when the moratorium permitted by RBI expires. Most of the loan granted to MSME sector will become NPA. Unfortunately, the Govt haven’t addressed the issue of banking sector reform in th
      e budget other than a proposal of Bad Bank and allocation of Rs 20,000 cr towards recapitalisation.


  2. Running an economy of a country like India is like understanding the “Self” through Vedanta. Multiple philosophies each with their own conviction and approach; advocating paths for Moksha/Liberation. What you choose, is what you strongly feel about. But what is essential is progress towards the objective. I think in that aspect the FM has not disappointed.


  3. Very good analysis. But to me selling/ disinvestment of PSUS /Insurance company/ merger of of banks particularly the profit making PSUS/Insurance/ Banks may lead to another socio economic issues and may enhance more unemployment problem.


    1. Thank you. I agree with you about the issue of job loss in the short run. Till the 80’s PSUs generated huge number of jobs when private capital infusion was low. Situation started changing from 90’s when Services sector started growing by leaps & bounds. Job creation in the manufacturing sector will keep reducing due to application of 3 D technology and robotics. As PSUs are mostly in manufacturing sector, the impact of job loss may not be felt in the long run, as more and people will be absorbed in Services sector. Typical examples are gig workers, aggregators etc which will provide employment.


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