Too many assumptions behind the govt’s 2021-22 budget projections make it a big gamble

Too many assumptions behind the government’s 2021-22 budget projections make India’s new budget a big gamble. The budget proposal to spend over Rs. 34.83 lakh crore in the coming fiscal is subject to the receipts (other than borrowings) of Rs 19.76 lakh crore in 2021-22, which is 23 percent higher than the revised estimates of 2020-21. The revised estimates for receipts in 2020-21 were 29 percent lower than the original budget estimates for the year due to the pandemic.

The budgeted receipts target for 2021-22 is entirely based on an important assumption that the nominal GDP will grow by 14.4 percent. Interestingly, the Reserve Bank of India and the government’s own chief economic advisor differed on the GDP forecast.

The projections on the revenues side have also factored in a tax buoyancy of 1.6 times in direct taxes. Gross tax revenues are projected to rise by 16.7 percent, mainly due to an assumption of 22 percent increase in direct taxes. However, it is too early to foresee the behaviour of the pandemic, the availability and impact of preventive vaccines and public confidence. The actual fiscal deficit, financing modes and possible

inflationary pressure pose other areas of the gamble. If the current financial year was absolutely abnormal, it is too early to assume that the economy will soon rebound with massive vigour in the coming fiscal.

The mode of deficit financing is a major concern. The projection of the budget deficit is quite large. The fiscal deficit is targeted at 6.8 percent of GDP in 2021-22, down from the revised estimate of 9.5 percent for the current fiscal. This year’s fiscal deficit has been funded by government borrowings, multilateral borrowings, small saving funds and short term borrowings. How does the government plan to finance the fiscal deficit in 2021-22? What was the extent of multilateral borrowings in 2020-21?

The financing of fiscal deficit is proposed to be mainly done through higher market borrowings, disinvestment and receipts from the indirect taxes including import duties and cess. Net borrowing is estimated to come down to Rs 9.67 lakh crore for next fiscal from Rs 12.73 lakh crore estimated for the current fiscal. The borrowing target for the coming fiscal is still very large.

This is particularly so in the present context where global ratings agencies Standard & Poor’s, Moody's and Fitch currently have the lowest investment grade rating on India, just a notch above ‘junk’. What will be the real cost of new borrowings? Is it safe to go for large foreign borrowings? There is no clear answer. Maybe, it would be right for the government to issue long-term Rupee bonds, tax-free bonds locally to mop up the surplus funds with the public looking for better investment options than bank and corporate fixed deposits and debentures.

If the government continues to borrow heavily from multilateral sources, its share of the country’s external debt will jump. The poor investment grade rating on India will impact the cost of foreign borrowing. A further Rupee devaluation will make things worse for debt servicing. Things were manageable till 2019-20 when the sovereign debt actually shrank.

India’s total external debt rose 2.8 percent year-on-year to $558.5 billion as on March 31, 2020, mainly due to a rise in commercial borrowings, according to the finance ministry.

‘India's External Debt: A Status Report: 2019-2020’ said the ratio of foreign currency reserves to external debt stood at 85.5 percent in FY20. External debt as a percentage of GDP rose to 20.6 percent in FY20 from 19.8 percent a year ago. Loans from multi-lateral and bilateral sources under external assistance grew 4.9 percent year-on-year to $87.2 billion. Non-sovereign debt rose 4.2 percent to $457.7 billion in FY20. Commercial borrowings increased by 6.7 percent to $220.3 billion. The debt management is going to be a tough task for the government.

Given the current business scenario, the economy is unlikely to grow rapidly in the coming months. India’s busy economic season will be over by next month. Then, the lean season starts. The next busy season will come only towards the end of September. However, much will depend on the behaviour of the summer monsoon, which had been more or less steady in the last three years. A prolonged dry spell or insufficient rains in agriculturally rich regions during this year can substantially impact the economic growth projections and the government’s revenue collection targets.

The economy is already reeling under artificially high petrol and diesel prices which are bound to constrain consumption in the coming year. Consumption constraints will impact production and employment. In her post-budget press conference, Finance Minister Nirmala Sitharaman said those who lost employment last year are expected to get back their jobs following the sops offered to employers on PF account.

However, on ground, things don’t look that easy. The travel and tourism sector alone lost business worth over Rs. one lakh crore last year. Delhi’s hotels are barely running at 50 percent capacity. Hotel rents are slashed. So are the number of employees. In house facilities are down.

The story is the same everywhere. Puri’s Jagannath Temple is now open to the public. However, not many visitors are willing to travel to Puri, immediately.

The two key focus areas of the budget are healthcare and infrastructure spending. The proposed health spending is up by 137 percent. It is most welcome. Infrastructure too gets a boost which may be good news for all, including job seekers. A new Development Finance Institution with a starting capital of $2.7bn is planned to be set up to help fund large-scale infrastructure projects. Hopefully, this will kickstart spending and offer relief to banks, which are suffering from mountains of debt.

The government is also working on an asset reconstruction and management company that will take on unpaid debt from existing banks to free up their lending capacity. The 'Bad Bank' is expected to absorb Rs. two lakh crore worth of non-performing assets (NPA). They are important features of the 2021-22 budget. Significantly, the FM has full

faith in her budget assumptions and called them conservative. She quoted from Rabindranath Tagore: “Faith is the bird that feels the light and sings when the dawn is still dark.”

(IPA Service)

(Views expressed are personal)