Finance minister will have to do a tough balancing act with Budget 2021

The budget has to curtail fiscal deficit yet provide the much-required stimulus to the pandemic-hit sectors; govt should focus on spending on infra, healthcare and MSMEs to create job opportunities and this boost private consumption

Nirmala Sitharaman
Since the tax was imposed, income tax demand has been raised in 17 cases, Sitharaman informed Parliament on Thursday. | File photo: PTI

Finance Minister Nirmala Sitharam needs to do a tightrope walk in Budget 2021, which is basically an exercise to balance revenue and expenditure. Ideally, public expenditure should not exceed revenue or income; when it does, it results in fiscal deficit. An increase in fiscal deficit figures also triggers the possibility of higher current account deficit and inflation. International rating agencies and investors gauge the strength or weakness of a country’s economy from its fiscal deficit figures, which they monitor closely. The country’s fiscal deficit is rising year on year and is a considerable cause for concern.

Also read: A first since Independence: Budget to be paperless due to COVID scare

Budget 2020 had set a fiscal deficit target of 3.5% of nominal GDP, but this crossed 4.6% by April 2020 due to the lockdown-induced economic slowdown. Moreover, the government started schemes like Prime Minister’s Garib Kalyan Yojana and Atmanirbhar Bharat have further compounded the fiscal deficit. The fiscal deficit figures may climb to  around  8% of the GDP in the present fiscal year due to huge fiscal outlay. Despite this harsh reality, some economists opine that the fiscal deficit should be relaxed during the pandemic.

For the government, the only way to offset these fiscal deficits is to increase tax rates in future budgets. Higher fiscal deficit would increase the government’s public debt and borrowings, which would hamper long-term growth due to increased interest payments. This will have a multiplier effect on subsequent budgets. It could even result in economic stagnation in the long term and defeat the vision of a $5-trillion economy.

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Public expenditure is essential to provide incentives for private consumption, which needs to be allocated only to the priority sector. Considering the falling growth and demand, the government needs to spend to revive normalcy. Therefore, spending on the priority sectors is essential as it creates huge employment opportunities, which will provide higher disposable income to the people. In turn, this would increase private consumption.

Today infrastructure, healthcare, micro, small & medium enterprises (MSMEs), besides travel and tourism, should be earmarked as priority sectors. The country’s inadequate infrastructure like rough roads, erratic electricity supply, weak water distribution systems, besides inefficient ports, few airports and railways have to be ramped up in a big way. The much-needed money for these infrastructure projects can only be generated through public borrowings  like infrastructure bonds.

The COVID-19 pandemic has highlighted the poor public healthcare infrastructure in the country, which was evident from the serious shortage of ventilators and oxygen cylinders.  Hence, there is a need to build the health care infrastructure to battle any unforeseen contingencies. One of the priorities of this budget is to allocate sufficient funds to become self-reliant to handle any such health emergencies. Now that the vaccination drive has commenced, there is a need to build systems for universal vaccination. In this context, the government needs to rethink investments to build sophisticated cold chain facilities and warehousing facilities across the length and breadth of the country.

Also read: Govt may announce major power distribution reform in Budget

Similarly, another dimension to public healthcare has to do with health insurance wherein the budget should raise the limit for deduction of premiums to attract people to buy policies. It would help to increase revenue to the insurance sector and, thereby, generate tax revenue for the government.

The MSMEs, being the largest employment provider, have severely suffered during this pandemic-induced lockdown. The government, therefore, needs to provide stimulus through tax reliefs and tax holidays to enable these units to recover quickly and revive themselves. The eligibility criteria for collateral-free loan and moratorium period under Atmanirbhar campaign should be liberalised for MSMEs considering the current situation. In addition, the government needs to look at reducing the interest rates on these collateral-free loans.

Clearly travel, tourism and hospitality sectors are the worst hit and desperately require support from the government. There is a need to create demand for this industry. Due to slogans like “stay home, stay safe”, people have hardly travelled anywhere due to the fear of  infection which has adversely affected the tourism sector. Perhaps, the government could consider some changes in the leave travel concession (LTC) provisions to make it favourable for the industry, besides tax relief and tax concessions.

The other route to revenue generation would be through disinvestment in public sector undertakings to help reduce fiscal deficit. Another move could be to hike long-term capital gains tax on sale of listed shares, currently at 10%. However, this would send negative signals to the stock markets, which might hurt investor sentiment and might affect foreign investments. It is also to be noted that no indexation benefit is provided to calculate  long-term capital gains for equity-oriented instruments.

Also read: V-shaped recovery on, economy resilient, robust: Finance Ministry report

Today, the economy suffers from a dip in revenue collections compared to last year, as is evident from lower GST figures. Even the direct tax collections are likely to be lower due to loss of income of salaried individuals and business entities. But, the government has already rolled out many schemes to the tune of  ₹29.87 lakh crore in the current fiscal year and is left with very few options to raise funds. The budget as an instrument to manage the exchequer has to curtail fiscal deficit, yet provide the much-required stimulus to the pandemic-hit sectors.

(The writers  are  Assistant Professors with the Department of Commerce, Christ Deemed to be University, Bengaluru)

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