Budget 2021: A knight or a trickster in shining armour?

This year has been particularly problematic for the world economies, and India is no exception to that. For the said reason alone, the citizens and various industries had a lot of expectations and a fair amount of trepidation from this year’s Union budget - especially when it came to taxation.

February 1 brought in a huge sigh of relief on that account, when it became clear that the Finance Minister hadn’t proposed any major change in India’s direct tax regime (since whenever there is a change mentioned, it negatively affects the public). Barring a couple of tweaks related to Section 80(C) and citizens over the age of 75, the direct tax regime is essentially the same as the last change made towards the end of 2020.

My aim in this article is to show you what has changed, and why. We’ll focus particularly on:

• Capital expenditure allocations, and why that is a good thing;

• India finally acknowledging the extent of its fiscal deficit;

• A worrisome reduction in our government’s revenue expenditure;

• Increased outlays for the healthcare sector;

• Projections of our government’s tax revenues.

CapEx in 2021-2022

Capital expenditure (CapEx) is expenditure incurred towards the creation of long-term assets or, in simple words, investment in infrastructure. The good news is that budgetary allocations for CapEx have increased by 26 per cent over the previous year’s Revised Estimates (RE). In a year in which India has seen a contraction of GDP, this, on the face of it, is extremely good news. As Rathin Roy points out, however, in his recent article, that’s not necessarily the whole story. The fact is that out of the entire increase in the fiscal deficit this year, around 79 per cent will go towards revenue expenditure, leaving only 21 per cent for capital expenditure. When compared to the last year’s numbers, this actually represents a marginal decline from 23 per cent, in terms of the composition of the total public expenditure.

Also Read: Are hospitality, real estate, automobile sectors happy with the Union Budget 2021?

What’s up with India’s Fiscal Deficit?

Speaking of the fiscal deficit, that perhaps is the biggest - and indeed, a most welcome change in this year’s budget. One might wonder what we’re talking about, given the fact that the fiscal deficit has ballooned to a gulp-worthy 9.5 per cent! But as Vivek Kaul points out in his recently-authored article, this is actually good news.

The reason it’s good news is that we finally have gotten around to acknowledging the true extent of our fiscal deficit. But what might this possibly mean?

As it turns out, the Indian government follows what is known as cash-based accounting. We acknowledge money as being spent only when it’s actually out of the government’s account. Say I spend money on someone’s behalf, and that someone agrees to pay me later. They should, ideally, reflect this money owed on their books of accounts.

Well, until yesterday, the government didn’t! It asked an entity called the Food Corporation of India to incur debt on its behalf, and all the debt piled up on FCI’s books. This has been going on for a while, and it was only with this year’s budget that the proverbial bullet was bitten and the debt was acknowledged. By the way, if you are wondering, it was a rather generously sized bullet of Rs 3, 44,077 crore.

And that’s why the fiscal deficit is high as it is this year, and so much higher than last year - because this debt is now finally on the Government of India’s books. We’ve become better at acknowledging reality, and that is a Really Good Thing.

With the Good Comes the Bad

On the flip side, however, a lot of economists are left wondering why revenue expenditure is actually down when compared to the previous year - and that too on the back of a pandemic. I anticipate that by March 31, 2021, we will have spent Rs 3,011,142 crores - and for the year to come, we plan to spend Rs 2,929,000 crores. The fiscal rectitude is a wonderful thing, but this cut does mean that the govt will end-up spending less on a whole variety of schemes. This includes, as has been noted, MGNREGA, with a cut of about 34.5 per cent - from Rs 1.11 lakh crores to Rs 73,000 crores and a 6 per cent —from Rs 99,311 crores to Rs 93,223 crores — reduction in spending on education.

The health and the wealth

A sector that has grabbed everybody’s attention this year - and for obvious reasons - is health. First, the good news - this year’s budget shows an increase of approximately 9.62 per cent in the Ministry of Health and Family Welfare allocations, as compared to the previous year’s budget. The govt’s flagship scheme when it comes to health, the ‘Pradhan Mantri Jan Arogya Yojana (PM-JAY)’, has seen an allocation of Rs 6,400 crores. This is impressive, especially when compared to the govt’s expenditure on this scheme this past year, which was - Rs 3,100 crores. There’s just one problem, though that the amount allocated last year was also Rs 6,400 crores. Put another way, only half of what was allocated was spent.

This budget also brought a must-welcomed announcement regarding the strengthening of health infrastructure in India, under the aegis of the PM Atmanirbhar Swasth Bharat Yojana. The scheme has an outlay of around Rs 64,180 crore over six years, and it will be interesting to see the implementation of this scheme on the ground as time goes by.

Where Will Tax Revenues Go Next?

This past year, our government’s budget estimates for tax collections were Rs 16,35,909 crores. The government now anticipates tax collections of Rs 13,44,501 crores for the current year. This is a sharp drop, to be sure, but given the pandemic, an entirely understandable one! From this revised estimate, the government hopes to drive tax collections worth Rs 15,45,396 crores.

The implied tax buoyancy - the increase in tax collections compared to the increase in GDP - is around 1.2 for FY’22 and 1.3 for FY’21. This assumption is crucial on two counts. First, we have to hope and pray that there isn’t a recurrence of the pandemic in the year to come. Second, it is THIS assumption that becomes one of the core assumptions behind how the fiscal deficit will evolve over the coming year.

Keep it real, maybe!

The other assumption behind the fiscal deficit calculation is that of our divestment proceeds. While the stated aims are welcome indeed (the biggest of which is LICs planned IPO, among other things), one needs to keep in mind that we hoped to raise Rs 210,000 crores last year, and were able to raise only Rs 32,000 crores. As Rathin Roy notes acerbically, last year, the Indian govt couldn’t do what the Reliance Industries could!

(Dr Ashish Kulkarni is an Assistant Professor at the Gokhale Institute of Politics and Economics. Devangee Halder and Rajlakshmi Chavan have contributed to the research of the opinion piece. The views expressed in this article are the authors' personal views. The facts and opinions in the article do not reflect TBC's views and take no responsibility for them.)