The Union Budget for fiscal 2021-22 (FY22) was to deliver a lot, as expectations had built up to a crescendo after the government signalled that something big should be expected. As it is, an official update on what has transpired in FY21 and what is to be expected in FY22, the announcements and revelations are important. On the expenditure side, the Budget surely does fulfill meeting expectation.
Let us first look at the FY21 update. The fiscal deficit has been placed at 9.5 per cent, which is much higher than what was expected due to higher expenditures as the increase was around Rs 4.1 trillion from Rs 30.4 to Rs 34.5 trillion. Hence, there has been a combination of revenue slippage as well as higher expenditure, leading to an increase of deficit by 6 per cent of gross domestic product (GDP).
As to the Budget for FY22, four questions were of importance. The first was the fiscal deficit number, which is probably the starting point of the Budget. At 6.8 per cent, it does indicate that fiscal consolidation has not been high on priority this time and has gone in for a stimulus this year. It will take another four years for bringing the deficit to come down to less than 4.5 per cent. This also means the overall borrowing programme for the year, which though lower than that for FY21, would still be quite high at Rs 12 trillion and something that the market will be watching. One can expect commercial credit growth to pick up which in turn will put pressure liquidity. The Reserve Bank of India (RBI) will take note of this in its upcoming policy as well as April announcement. There will prima facie be pressure on interest rates going forward. More so, as states can have a deficit of 4 per cent in the coming year, which means there will be more borrowing in the market from this end, too.
The second was on taxation where there were several expectations. Here, the Finance Minister has not really given any consumption boosting measures and has concentrated more on administrative reforms to ease the processes.
Third is on expenditure, and here it does appear that the Budget has been aggressive, especially when we look at the composition. The capex for the year has been placed at Rs 5.54 trillion, which while being an increase of 26 per cent over the revised estimate for FY21, is a good start. However, admittedly there will be a lot to be done by the private sector for investment rate to really pick up during the year. This amount is around 2.5 per cent of GDP, which can prod but not drive overall investment in the economy. The setting up of a new DFI is an affirmative step taken and hopefully should materialize in the year will provide the right impetus for infrastructure.
Last is the disinvestment target, which at Rs 1.75 trillion for the year may once again look to be optimistic given the track record we have had. It has been indicated that the plans for disinvestment are ready and it is only the implementation button that has to be pushed. This time big names are on the list and includes two public sector banks, Life Insurance Corporation (LIC), one general insurance company, Air India, BPCL, and others. The government has also spoken of monetisation of government assets like land, and this could be a minor contributor this year, but has potential to be a revenue earner in future. Ideally, such schemes must involve leases so that the asset is still owned by the government.
On the whole, the Budget has delivered a fairly effective boost on capex while bringing about some reforms in the financial sector: bad bank, DFI and bank capitalisation. The pressure on liquidity will be there given the higher deficit and borrowings which is reckoned. This can mean that interest rates will have to be monitored by the RBI closely.
(Madan Sabnavis, chief economist at CARE Ratings and the author of 'Hits & Misses: The Indian Banking Story’'. The views expressed are personal.)