Union Budget 2021 | Aiming for better-quality growth

Spending will continue despite limited new tax revenue, and the focus is clearly on stimulating growth after a once-in-a-century shock.

The pronouncements in the Union Budget for next fiscal is growth-centric and expansionary. It pushes many right buttons, while focussing on improving Indiaโ€™s mid-term growth trajectory.

Spending will continue despite limited new tax revenue, and the focus is clearly on stimulating growth after a once-in-a-century shock.

While this implies higher-than-anticipated fiscal deficit and borrowings, and therefore adds an upside risk to interest rates, the quality of spending will improve, which is crucial.

The compound annual growth rate in capital expenditure versus fiscal 2020 is a praiseworthy 28%, while revenue expenditure growth is contained at 12%.

Segments such as roads, railways and power stand out in terms of allocations for next fiscal.

Reduced dependence on Internal and Extra Budgetary Resources โ€” essentially off balance sheet financing done through public sector and government entities such as the National Highways Authority of India โ€” for funding capex is also salutary.

There are also other noteworthy and progressive steps for the financial sector, including the plan to privatise some public sector banks, transfer bad loans to a โ€˜bad bankโ€™, adequate allocation for recapitalisation, and increase in foreign direct investment limit in insurance.

Privatisation of public sector banks and a general insurance company through stake sale will help reduce the burden of recapitalisation on the government, and increase competition in the banking and insurance sector.

On the other hand, setting up of an asset reconstruction company (ARC) and an asset management company would help consolidate and take over existing stressed debt, and also manage and dispose of the assets to alternate investment funds and other potential investors for eventual value realisation.

With the establishment of ARC, impaired loans can move from the books of lenders, else it would have required higher provisioning from banks. This will help banks and non-banks to focus on fresh lending, leading to higher credit growth.

Asset monetisation in infrastructure, and the plan for a development finance institution will reduce the pressure on banks to fund long-term projects.

The government has also increased the existing National Infrastructure Pipeline from 6,835 to 7,400 projects โ€” involving a cumulative spending of โ‚น132 lakh crore till fiscal 2025.

While funding infrastructure projects through asset monetisation and a development finance institution is a step in the right direction, participation of international stakeholders would be crucial to success.

The thrust on domestic manufacturing is evident in higher custom duty for the Production-Linked Incentive scheme segments.

One area where more could have been done is the micro, small and medium enterprises (MSME) segment. Thatโ€™s because the better-than-expected corporate recovery seen in the past few months has passed them by. A few facilitations would have gone a long way in supporting a sector that is critical for jobs and exports. Of course these could be done outside of the budget, too.

Lastly, the budget assumes a sharp recovery in consumption segments without direct interventions. While there is no increase in income tax or new cess, the recovery curve will need monitoring, just to see if the private capex cycle is getting triggered finally.

Till then, the heavy lifting remit will continue to be on the governmentโ€™s rather broad shoulders.

(Amish Mehta is Chief Operating Officer of CRISIL Ltd)

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