1. It’s goodbye to fiscal orthodoxy.
Budget 2021 is a departure from a key tenet of the Washington Consensus macroeconomic stability.
GS-3: Government Budgeting.
CONTEXT:
- The government’s Budget for 2021-22 seems to signal with its fiscal deficit at 9.5% of GDP for FY21 and 6.8% in FY22 because government neoliberal fiscal policy. And not implementing The Fiscal Responsibility and Budget Management Act, 2003.
- Budget 2021 is a also leaving from a set of ten economic policy prescriptions considered to constitute the "standard" reform package promoted for crisis-wracked developing countries of the Washington Consensus on macroeconomic stability.
- The large fiscal deficit can fuel a rise in inflation, and large inflation can boost a sluggish economy by giving more money to people who can then buy and invest more.
A mix initiative:
- The government has increased duties on some imports in order to protect and foster domestic industry and fiscal deficit.
- It has introduced performance-linked incentives for designated sectors, something that goes counter to market economics.
- The government is, however, happy to adhere to other elements of market orthodoxy, such as privatisation and a greater role for foreign direct investment (FDI).
- The idea was to show that the economy was moving along a fiscal consolidation path, with a fiscal deficit of 3% of GDP as the eventual target. In this year’s Budget, the yearly projections are missing.
- All we have is a commitment to lower the fiscal deficit to 4.5% of GDP by 2025-26. As the deficit targets set out in the Fiscal Responsibility and Budget Management (FRBM) Act (2003).
- In this Budget, fiscal deficit goes out of the window. The Finance Minister has promised to introduce an amendment to the FRBM Act to formalize the new targets.
FRBM ACT 2003:
- It aims of act 2003 to make the Central government responsible for ensuring inter-generational equity in fiscal management and long-term macro-economic stability.
- The Act envisages the setting of limits on the Central government’s debt and deficits; it limited the fiscal deficit to 3% of the GDP.
- A Fiscal Responsibility and Budget Management (FRBM) panel (headed by N.K Singh,) has recommended a debt-to-GDP ratio of 38.7% for the central government, 20% for the state governments together, a fiscal deficit target of 2.5% of the GDP, and a revenue deficit of 0.8%
Moving away from framework:
- The Budget marks a departure from one of the key tenets of the Washington Consensus, the framework for market-oriented economics which has dominated policy making in most parts of the world.
- ‘‘Macroeconomic stability” means that government budgets need to be broadly in balance so that borrowings to finance the deficit are kept to the minimum.
- It has a quote from economist Olivier Blanchard, “If the interest rate paid by the government is less than the growth rate, then the intertemporal budget constraint facing the government no longer binds.”
The “intertemporal budget constraint” means that any debt outstanding today must be offset by future primary surpluses. Blanchard was saying that this is not true if the Interest Rate-Growth Differential (IRGD), the difference between the interest rate and growth rate, becomes negative. In the advanced economies, as interest rates have turned negative, Blanchard’s condition has been met. So governments there do not have to worry that deficits will render public debt unsustainable.
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The Washigton Consensus:
- It is a set of ten economic policy prescriptions considered to constitute the "standard" reform package promoted for crisis-wracked developing countries by Washington, D.C. based institutions such as the International Monetary Fund (IMF), World Bank and United States Department of the Treasury.
- The term was first used in 1989 by English economist John Williamson. The prescriptions encompassed policies in such areas as macroeconomic stabilization, economic opening with respect to both trade and investment, and the expansion of market forces within the domestic economy.
Government need to spend more:
- The International Monetary Fund (IMF) and the World Bank, both flag-bearers of the Washington Consensus, have been urging a departure from fiscal orthodoxy in the wake of the pandemic.
- Both these institutions used to be wary of any increase in the public debt to GDP ratio beyond 100%.
- Booth (IMF & WB) are urging the advanced economies to spend more by running up deficits even when the debt to GDP ratio is poised to rise to 125% by the end of 2021.
Key concerns:
- A large fiscal deficit can fuel a rise in inflation. The change in the fiscal consolidation targets will require a change in the inflation target of 4% set for the Reserve Bank of India.
- The Budget makes no mention of such a possibility. Perhaps the government did not want to administer too many surprises at one go.
- The tax to GDP ratio not rising as expected, the sale of public assets has become crucial to reduction in fiscal deficits in the years ahead. This is a high-risk strategy.
- For years now, revenues from disinvestment have fallen short of targets. The sale of Air India, which was begun in 2018, is still dragging on.
- We face up to an important reality that a large-scale privatization is not easily accomplished in India.
- Selling public assets cheap is politically contentious. There will be allegations of favoring certain industrial houses. Public sector unions are a vital political constituency.
- Privatization of banks raises concerns about financial stability. Job losses from privatization are bound to evoke a backlash.
Privatization means FDI:
- A Large-scale privatization almost always involves substantial FDI.
- In South East Asia and Eastern Europe, privatization of banks meant a large rise in foreign presence in the domestic economies.
- The Atmanirbhar Bharat connotes greater self-reliance and stronger Indian companies. The rise in FDI with Atmanirbhar Bharat is hard.
CONCLUSION:
- In the current situation, expansionary fiscal policy will boost growth and cause debt to GDP ratios to be lower, not higher. Given India’s growth potential, we do not have to worry about debt sustainability until 2030.
- The fear that the rating agencies would downgrade India if total public debt crossed, if 10%-11% of GDP. That is a risk that cannot be wished away unless the rating agencies have decided to toe the IMF-World Bank line on fiscal deficits.
- If the nation’s political -economy came in the way to meet the FRBM targets, it is also likely to pose an obstacle to large-scale privatisation.
2. A normal budget for abnormal times.
Contrary to expectations, the Budget maintains incrementalism and continues with business as usual.
GS-3: Government Budgeting.
CONTEXT:
- The Economic Survey projects India’s real GDP growth to be 11% in 2021-22, this double digit growth projection is on a very low base and even if these numbers are achieve.
- This echoes the intensity of growth in the abnormal times for the economy which requires non-standard policy responses, and which was the expectation from Budget 2021.
- The policy maker who designed the Budget, in turn decided to maintain incrementalism and continue business as usual.
GDP projection over low base year:
- Budget 2021 comes in the backdrop of pandemic from an estimated 7.7% contraction in 2020-21. India’s real GDP growth to be 11% in 2021-22, which is arrived by an implicit assumption of 4.4% inflation and a nominal GDP growth of 15.4%.
- This GDP growth path would entail a real GDP growth of 2.4% over the absolute(Terms) level of 2019-20;
- The Government eloquently laid out the “six pillars” on which the vision of the Budget rested. Which have been spread over the next six years,
- The construction of the six pillars, which was expected to be on the current year’s enhanced expenditures, seems to be a bit misplaced, with very little increase in the overall expenditure of the government.
- The fiscal arithmetic provides evidence of this as the total expenditure for 2020-21 is stated as ?34, 50,305 crore in the revised estimates, with a capital expenditure at ?4, 39,163 crore.
- The Budget estimates for 2021-22 states the total expenditure at ?34, 83,236 crore. This means an additional spending of just ?32,931 crore, which is less than even 1% in a year of income contraction for a vast majority of the population.
6- Pillars of Budget:
- Health and Well-Being: Union Budget hikes a sum of 137% in Health budget.
- Physical and Financial capital and infrastructure: aim to create jobs for youth, budget announced ? 1.97 lakh crore over 5 years starting this FY,
- Inclusive Development for Aspirational India: focus over Agriculture sector and its infrastructure, MSME and rural infrastructure.
- Reinvigorating Human Capital: the focuse area is Over 15000 schools will be qualitatively strengtehened,100 new Sainik Schools, Legislation for umbrella body of higher education, Central university in Leh.
- Innovation and R&D: National Research Foundation 50,000 crores outlay for over 5 years, space mission,ocean biodiversity, provide financial incentive to promote digital modes of payment are focus areas.
- Minimum Govt., Maximum Governance: digital india ,social security,and faster process in administration are focus areas.
No multiplier effects soon:
- The big bet for growth and employment generation, capital expenditure, increases by 26% but still accounts for only 15% of the total expenditure.
- This increase in capital expenditure, which is expected to be channelised via the infrastructure push, in turn bears two risks at the moment.
- Sector-specific targeted proposals, barring production-linked incentives for industry are few as agriculture and the micro and small industries segment which shores up demand with their consumption multipliers seem to have been accorded lower priority.
Expenditure Risks:
- There is the risk of delay in completion and administration, which leads to cost overruns.
- The life cycle of these projects is long; an inventory of funding needs to the ready in the pipeline.
- The immediate multiplier effects to lift the aggregate demand in the economy might not emanate as quickly as expected.
- There are no radical reform proposals for the agriculture sector, with no announcements with regard to bringing urea under the nutrient-based subsidy regime or rationalising the Public Distribution System issue prices of foodgrains.
- The recent growth performance of the sector has led, not to have any increase in cash transfers under the Pradhan Mantri Kisan Samman Nidhi Scheme (PM-KISAN) from the existing ?6,000 per year.
- Manufacturing growth, which is expected to be a catalyst in pushing the economy toward the $5-trillion economy goal (by 2025), Manufacturing growth, depend entirely on how private investments pick up.
- While the textile sector is the focal point to push employment and industrialisation, a lack of concrete policies towards export promotion and a pedalling with tariffs to increase protection is frequent, might undermine the competitiveness of manufacturing exports.
The issues that infrastructure:
- The execution risk and regulatory issues are still left wide open.
- The recapitalization of public sector banks looks short of the requirement.
- Given the emphasis on start-ups and one-person companies,
- The stress of NPA on the financial system in the coming years is likely to increase as these firms are more prone to the cycles in the economy.
- The Budget sets out some grand plans and does not provide the precise mechanisms to achieve those.
Resources and spending:
- The resource mobilisation for spending seems to be banking on disinvestment, privatisation and asset monetisation.
- The route for reducing fiscal deficit, from 9.5% to 6.8% of GDP, and implementing FRBM act.
- Because of better nominal growth, total revenue might get some boost from better tax revenue and compared to last year, there is a renewed hope for better divestment revenues.
Urban unemployment left out:
- Both employment and demand generation are left largely to the vagaries of growth cycles.
- While extending the social security benefits to gig economy workers is a welcome move,
- The lack of a concerted plan to tackle urban unemployment might prove costly, given the demographic profile and pace of urbanization of the country.
Way forward:
- The Budget reveals two interesting aspects of the political economy of policy formulation. “one nation one elections” as all the States that are going for elections this year get enhanced outlays Second, the reaction of stock markets”
- The growth push of the Budget subsumes the welfare implications, which is the hallmark of the ‘new welfares’ model of the present government
- Budget 2021-22 attempts to spell out some institutional changes in major areas such as tax administration and provides a push to public sector research and development.
- The digital push to Census operations might be a long-term investment towards publishing vital data about the economy, quickly and in time.
3. Poll pot: on Union Budget 2021.
The Budget as an instrument of politics found full play this year.
GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
GS-3: Government Budgeting.
CONTEXT:
- The entire focus of the budget is on the States of West Bengal, Assam, Tamil Nadu, Kerala and Puducherry, which are going to polls.
- The ?65,000 crore for the development of the NH 66 corridor in Kerala, For West Bengal, new “Economic Corridor” For Tamil Nadu, the proposed projects of one lakh crore rupees and new project in Assam and Pondicherry shows The Budget as an instrument of politics found.
- The election-going States of Kerala, Tamil Nadu, West Bengal and Assam in the Budget presented on Monday was unmistakable.
Budget allocation:
FOR KERALA:
- The massive outlay of ?65,000 crore for the development of the NH 66 corridor in Kerala.
- National Highway 66, commonly referred to as NH 66 (erstwhile NH-17 and a part of NH-47), is a 1,608 km long National Highway that runs north–south along the western coast of India, parallel to the Western Ghats.
- NH 66 connects Panvel (a city south of Mumbai) to Cape Comorin (Kanyakumari), passing through the states of Maharashtra, Goa, Karnataka, Kerala and Tamil Nadu.
- The announcement of the second phase of the Kochi Metro and the development of the Kochi fishing harbour as a commercial hub are big ticket in budget.
FOR ASSAM:
- The Budget announced that national highway works worth ?19,000 crore are in progress in Assam.
- The projects of more than ?34,000 crore covering over 1,300 km of national highways will be undertaken in the State within the next three years.
- The “transformation” of Assam’s road network over the last five years to showcase its focus on infrastructure development.
FOR WEST BENGAL:
- There is a new “Economic Corridor” covering 675 km of national highway, with an expected investment of ?25,000 crore.
- The 675 km of highway work in West Bengal at a cost of Rs 25,000 cr including the upgrading of existing roads in Kolkata, Siliguri.
- For an industry-starved State, which is still trying to wish away its anti-industry image, investment in infrastructure was aimed to give a message that the government has plans to bring in investment in the State.
FOR TAMIL NADU:
- The proposed projects could cost up to one lakh crore rupees. This includes the Chennai Metro Rail (phase two) of 118.9 km for ?63,246 crore and two expressways connecting Chennai.
- Madurai-Kollam corridor and Chittor- Thatchur corridor whose construction will begin in 2022.
Social sector allocation in this states:
- Social sector interventions in Assam and West Bengal get a special scheme, with a ?1,000 crore outlay, for the welfare of tea workers, especially women and children.
- Plantation workers and descendants “tea tribes” and “ex-tea tribes” comprise almost 20% of Assam’s total population, and are a decisive factor in many Assembly seats, in Assam and West Bengal.
The issues of Budget “As instrument of politics”
- The government should not be predicated entirely on immediate electoral calculations.
- The single-minded pursuit of its ideological politics is often a source of tensions,
- But its developmental politics expressed in the Budget, particularly the significant outlays for infrastructure, with discrimination with state has to be NOT appreciated.
CONCLUSION:
- The 11,000 km of national highway corridor was expected to be completed by March 2022 and that projects for 8500 km will be awarded in budget for state’s has to be appreciated.
- The announced the government's intentions to set up more economic corridors in the future, hinting at 3500 km of national highway works at an investment of Rs 1.03 lakh crores may bust the infrastructure in country.
- But budget not be use as an “instrument of politics”, and fund allocation must be sustainable and not discernment manner, also respect the constitutional value.