Edlyn Cardoza | 02 February, 2021 | Mumbai
The pandemic made the first-time ever paperless Budget 2021 appear even more challenging on the face of it, but in reality it has made it quite easy by the elimination of any meaningful policy trade-offs.
Since the last two quarters, the economy has been recovering faster, and sharply than suggested by the official growth numbers, which remain based on antiquated year-on-year comparisons. The economy contracted 23.9 percent in the second quarter, and 7.5 percent in the third quarter, according to the official year-ago growth numbers.
Comparisons of a year ago have a serious problem as they depend on what had happened four quarters earlier and don’t actually tell us about the growth momentum. On a quarterly basis, India’s GDP plummeted 25 percent in the second quarter of 2020 and grew by 21.5 percent in the third quarter of the same fiscal year – a narrative markedly different from that portrayed by the official numbers, according to the J.P. Morgan estimates.
The economy of course is likely to have grown another 10.5 percent in the fourth and is expected to deliver a negative growth rate of about 6.5 percent for the entire fiscal year and then rise again by 13.5 percent in FY22.
These full-year growth numbers are higher than the forecasts made of both the market consensus and the government. There is a two-fold optimism for this basis.
The first is that by design or accident, the country has managed to break the link between mobility and infection. The exact reasons are challenged, but if the vaccination rollout does proceed as predicted, then the adaptability should normalise by mid-year without threatening a new wave or variant of COVID-19 infections.
Second is the recent shift in the fiscal stance of the government. The government began to speed up on spending in September, after delaying it for almost six months. It is sad that the government began to ease up on spending, and waited till the tax revenue began to recover. While the proverb “live within one’s means” is good advice for governments, and individuals alike, it is calculated mostly as a medium-term principle. Instead, a critical goal of macroeconomic policy is to give countercyclical support to an economy to hose or dampen instability in the short run. Increasing spending when revenue is rising, probably because even an economy is simultaneously growing, features, rather than dampens, economic volatility. Nevertheless, the boost from government spending was expected to be a key support to fortify the recuperation in FY22.
Therefore, the economics had simplified the budgetary choices. Privatisation and taxes would reasonably be expected to rise, given that the economy is recovering, and the equity market is surging. The revenue increase could be utilized to reduce the deficit while continuing to spend comprehensively at its current share of the Gross Domestic Product (GDP). In line with the nominal GDP, this would allow the spending to grow by 17-18 percent. But the option really came down to where to spend.
Reasonability dictated mostly on infrastructure and income support, especially on public health.
In the event, the Budget extensively met these ends, with a notable exception. The Budget 2021, pegged the deficit at 9.5 percent of GDP, which is quite higher than market estimates which is around 7 percent and a 5 percent-point rise over the previous year. However, this is largely optical. Rather than subsidizing food procurement through off-balance-sheet borrowing by the Food Corporation of India (FCI), as has been the situation over the last few years, the current year’s Budget has appropriately brought a portion of that spending back on its accounts. Excluding subsidies and interest payments, the increment in the deficit is just 2 percentage points of GDP.
The Budget for FY22 targets a deficit of 6.8 percent of GDP. Much of the heavy lifting in the 2.7 percentage points of GDP reduction is finished by lower subsidies and higher privatization. Excluding interest payments, and subsidies, the Budget aims 0.5 percentage points of GDP in total spending, with the capital expenditure rising to only 0.2 percentage points of GDP.
Budget 2021 has not been friendly to the Indian middle class as they would have wanted it to be. While there were many changes seen in the infrastructure and healthcare areas, the Income Tax sector saw no change whatsoever this year.
This of course did not sit well with the Indian middle class, who felt that the Budget 2021 did not address their concerns as much as they wanted to, and in fact made them feel ignored.
Given that the COVID-19 pandemic wasn’t kind in any way, especially economically, adding on the Budget 2021 left the taxpayers out in the cold.
Relaxation on the direct taxations and more would surely be a relief to the common man, who were either working on a reduced salary, left their jobs, or in cases of small business owners had to completely shut shop.
Salaried individuals were not at all content with the Budget as it did not include any direct tax reliefs. Keeping in mind, people had been clinging on to hope for some breaks on long-term capital gains taxes, as well as on savings-related instruments such as PPF.
In the details, while there is an emphasis on improving the financing of infrastructure projects, public health, and on privatising banks and insurance companies, the glaring oversight is the continued absence of income support.
So why is this important?
Underlying the strong headline recovery in growth, imbalances in the economy have extended significantly. According to The Indian Express, the scarring in the labour market is extensive, where private surveys point towards a staggering 18 million job losses, and the likely damage to household and SME balance sheets substantial, where according to the RBI, the profits of listed companies rose 30 percent in the third quarter of FY20, which implies a disproportionately large decline in SME and household income if the overall GDP fell 7.5 percent that quarter.
While a debt moratorium and other regulatory forbearance have concealed the degree of the damage, these measures essentially delay the eventual reckoning. A key risk factor is that not only will the medium-term growth be impaired because of the scarring, but also that banks turn risk-averse and do not extend credit exactly when the recovery is relied up to assemble strength once mobility fully normalises.
While the Budget is productive and has assisted to allay fears of exorbitant fiscal tightening, it did not as far as to mitigate the tail risk that the economic recovery does not transform into a “dead cat bounce”.
Image Sources :
- The Financial Express