Budget 2021 bets heavily on a sharp recovery, and therein lies the risk

Finance Minister Nirmala Sitharaman’s Budget 2021-22 lived up to the hyped expectations, delivering what appeared to be a spending splurge to the ailing, pandemic-hit economy. But the fact that she has bet so heavily on the kind of quick revival of economic growth that was predicted in the Economic Survey last week appears to pose some risks as well.

Higher capital outlays

The Finance Minister’s entire speech was littered with an emphasis on spending — from healthcare to capital investment in projects — promising to lift all boats at once to revive growth. She gave the impression that the government’s spending would increase significantly in the next financial year. She legitimately highlighted an apparently high-point of her budget — that capital expenditure would increase from ₹4.39 lakh crore in the current year to ₹5.54 lakh crore, an increase of 26 per cent.

But capital expenditure accounted for about 12 per cent of the overall expenditure of the government in a “normal”, like in pre-COVID 2018-19. All other constituents of overall expenditure of the government are projected to increase at a much more slovenly pace — from ₹34.5 lakh crore in the current year to ₹34.83 lakh crore, which implies an increase of a paltry increase of less than one per cent. In fact, this actually implies a decline in real terms, after accounting for inflation.

In fact, if capital outlays are excluded, the remaining expenditure actually is projected to decline from ₹30.11 lakh crore in the current year to ₹29.29 lakh crore in 2021-22, a decline of 2.72 per cent!

This means that the government’s non-capital outlays are set to take a big hit when the pandemic’s effects are still ongoing. This will mean that other expenditures such as those on rural development, employment schemes under the Mahatma Gandhi National Rural Employment Guarantee Act, education, health and other schemes may well face a squeeze next year.

Betting on growth and buoyant revenues

The obvious question that arises in the common folk is: if everything looks so hunky dory, where is the money going to come from?

Here, the Finance Minister seems to be betting heavily on growth. The Centre’s net tax revenue was projected to increase by 21 per cent, according to her last budget. The pandemic upended it, resulting in the projected net tax revenues actually falling. By 18 per cent in the current year. From here, Nirmala Sitharaman expects net tax revenues to increase 15 per cent in the next year. Mind you, even that increase would still keep the Centre’s net tax revenues in 2021-22 below last year’s budget estimates.

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Meanwhile, the concessions that the Finance Minister offered on the Corporation Tax front, well before the onset of the pandemic, mean that this tax now contributes less than what is collected by way of Income Tax. Last year, the Finance Minister hoped to collect ₹6.81 lakh crore by way of Corporation Tax and ₹6.38 lakh crore through Income Tax; the revised estimates now show the two taxes have flipped positions. Income Tax collections are now projected to be higher than collections by way of Corporation Tax. What is more, this is projected to be maintained during the next financial year, implying that this was not a one-off pandemic-induced aberration.

Alongside this development on the tax front, the Finance Minister seems to strongly believe that the recently noticed buoyancy in revenues from the most important indirect tax, the Goods and Service Tax (GST), will continue in thee next year. GST revenues in the current year are projected to yield ₹5.15 lakh crore, 25 per cent lower than what the minister expected a year ago. She is optimistic that she would recover 22 per cent if this deficit in the next year.

Interestingly, but not surprisingly, the only head of taxes that delivered an increase over last year’s budgeted estimate was Union Excise Duties. Excise collections, which were projected to yield ₹2.67 lakh crore in the current year, is actually expected to deliver ₹3.61 lakh crore, that is, 35 per cent more revenues in the year of the pandemic. The incessant rise of petroleum product prices, even during the pandemic, has obviously resulted in this bonanza for the government.

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It is evident that the Finance Minister has hedged some of the risks by latching on to the use of the cess as a source of revenue. Cesses were generally regarded to be for short durations and for specific purposes; it has become a habit for Finance Ministers to keep them perpetually alive, using them as just another revenue-gathering device.

The levy of the cess on an unprecedented range of goods — all in the name of name of the Indian farmer who is ranged against the Government for the last couple of months — makes this budget truly unique. From gold and silver to petrol, liquor and palm oil, the list of commodities that would be subjected to a cess is rather long. The fact that it comes into effect from February 2 means that the meter starts ticking immediately.

There are significant risks that even the higher capital outlays may not be able to deliver an increase in productive capacity. For example, several of the railway projects mentioned by her are to be in Public Private Partnership mode. If the experience of the last few years is any indication, private investors have not exactly been enthusiastic in filling in with their share of participation in projects.

All the numbers in the budget rest on a key assumption — that India’s nominal Gross Domestic Product would increase by 14.4 per cent in the next financial year. All the estimates — from the extent to which revenues would actually materialise to the eventual size of the fiscal deficit rests on this assumption holding true in a year when the pandemic is still hovering.

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