What FM Sitharaman may and may not do in her promised 'never-before' Budget

Wish lists are routine as the govt prepares its annual Budget. But its finances are stretched and the pandemic isn't over. Akash Podishetty lists what the FM could announce in the Budget on Feb 1

The Union Budget on February 1 will aim to revive India's economy, which is projected to contract by 7.7 per cent in 2020-21, according to the government's first advance estimate. The economy was slowing down even before the Covid-19 pandemic grounded growth. It improved in the second quarter of the current financial year (FY21) after enduring a blow in the first quarter, but the impact of the pandemic could last long. Rating agency Fitch sees medium-term growth between FY23-FY26 to be at around 6.5 per cent a year.

In this context, the Budget’s fiscal thrust will be decisive in helping the economy. During pre-Budget consultations, the government received suggestions from various stakeholders on fiscal policy, taxation, sustainable growth, and other issues. Industry hopes the Budget will revive consumption and prompt investment. Households and small businesses want relief; infrastructure needs spending and healthcare has to be improved. Budget wish lists are numerous, but resources are constrained. The fiscal deficit is likely to be almost twice the budgeted target of 3.5 per cent of GDP this financial year. Finance Minister Nirmala Sitharaman has said she is not worried about the deficit number as "there is a need, and a clear need, for the government to spend the money.” 

The Budget is weeks away. In the meantime, here is what it may do and is unlikely to.

Healthcare

The pandemic has exposed the decades-long gaps in India's healthcare, prompting the government to look at it as one of priority sectors in the Budget. Sitharaman, speaking at multiple events, has said the country has to spend on healthcare and livelihood. The Budget outlay for health—including the expense for Covid-19 vaccines—is expected to be higher. Economists favour raising health expenditure to more than 1.25 per cent of GDP, compared to the 0.3 per cent now. The 15th Finance Commission, too, is said to be in favour of increasing the combined outlay by the central government and the states for health to 2.5 per cent of GDP. The Budget may have incentives to promote telemedicine, the practice of caring for patients remotely.

Infrastructure

The Budget is likely to spend more on public infrastructure to get the economy moving and create jobs. It may have incentives for private infrastructure investments. The government's total expenditure plan is likely to be higher for 2021-22 compared to the budgeted Rs 30.4 trillion in 2020-21. Sitharaman doesn’t have much room to spend as the government's tax revenues are stressed and it is falling short on disinvestment targets. The size of the actual spending in coming financial year will also depend on the revenues that the government can generate. It hopes the economic growth in the next year will lead to a rise in tax revenues. Given the fiscal constraints, the government may restructure expenditure in favour of capex as it looks to accelerate investments and complete projects under the National Infrastructure Pipeline (NIP). Media reports said the government may set up a development finance institution (DFI) and other measures to support funding for infra.

Bank credit

Bank credit is an important tool for investment and growth. The Reserve Bank of India’s Financial Stability Report (FSR) said in December banks’ gross non-performing assets (GNPAs) may rise to 13.5 per cent by September 2021, and escalate to 14.8 per cent under the severe stress scenario. The government put Rs 3.56 trillion in state-run banks between 2015-16 and 2019-20 through direct subscription of equity shares and recapitalisation bonds, but stayed away from any provisioning in 2020-21. The need to maintain liquidity in the economy could mean that state-owned banks might get funds. Apart from that, the government is reportedly weighing a Budget proposal to set up a Bank Investment Company. The BIC would come under the Companies Act and the government will transfer to it its stake in state-run banks. The government might consider easing the classification period for bad loans to 120-180 days from the current 90 days.

Taxes

Industry wants Income Tax to be untouched given that the economy is under stress and people have suffered salary cuts. With tax rates already reasonable, analysts don't expect significant deductions or exemptions in direct taxation. The government may raise the basic tax exemption limit to Rs 5 lakh from Rs 2.5 lakh though. It is considering a Covid-19 cess to fund spending incurred due to the pandemic, reported the Economic Times quoting government officials. There are calls for widening the net of Section 80D of the Income Tax Act, which allows individuals to claim tax breaks on premiums paid for medical insurance. Economists at the State Bank of India have suggested in a report that the government should consider waiving off tax on interest income of Senior Citizens Savings Schemes (SCSS). Import duties may be raised on some consumer goods to boost local manufacturing. Industry players are also hopeful that the government will exempt tax on long-term capital gains (LTCG) arising on sale of listed equity shares.

The government will also aim to sell off its stake in various state-owned firms, including national carrier Air India and fuel company BPCL, and raise the disinvestment target for the next financial year. It set an ambitious divestment target of Rs 2.1 trillion in Budget 2020-21, but is likely to fall short.

Jobs

Job creation is on the top of policymakers' agenda. The labour market has taken a body blow in the pandemic and many experts have called for the Budget to lay out incentives for the micro, small, and medium enterprises (MSME) sector, which is the biggest employment creator in the country. Other measures that are likely to find a Budget mention include the vehicle-scrappage policy to boost automobile demand. For asset monetisation, the government might announce the launch of an online bidding platform to sell the non-core assets of public sector units (PSUs) like land and properties.

The renewed focus on public infra and capex spending could mean that the allocation for education might take a backseat with no significant rise for another year. It remains to be seen how the government manages defence expenditure in light of India’s military standoff with China in eastern Ladakh. The government may be forced to trim some centrally sponsored schemes to finance other sectors that need urgent attention. Such schemes have an allocation of Rs 3.4 trillion, accounting for about 9 per cent of the Union Budget.

"Send me your inputs so that we can see a Budget which is a Budget like never before, in a way. Hundred years of India wouldn't have seen a Budget being made post pandemic like this," Sitharaman told a business summit in December.

"A never-before" Budget is what India needs.