On the right course

T he Union Budget 2021-22 has been one of the most anticipated in recent history. In the run-up to the Budget, the government would have wanted an optimal fiscal policy as well ensuring that the Budget acts as catalyst for India’s sustained long-term growth. It was satisfying to note that during the height of the pandemic the government did not become overzealous in its stimulus package keeping the fisc in mind.

Positively, the FM did not raise the tax rates for individuals. Further, according to the FM, the agri cess on petrol and diesel will not affect the end-consumer as excise duties have been reduced on them. However, the move to tax interest earned on employee provident fund/PPF, will hurt the middle class, particularly salaried employees.

Fiscal deficit target

Keeping the fiscal deficit at 9.5 per cent of the GDP for FY21 and 6.8 per cent of the GDP for FY22 is a manageable target, when taken in the context of the health catastrophe that affected all of us. It is better to keep the fiscal deficit higher now and bring it down incrementally to 4.5 per cent of the GDP by FY26 to achieve fiscal consolidation. Under these exceptional circumstances where the government revenues are weak, investors and markets will not view the higher fiscal deficit target as a negative.

Between the disinvestment commitment and an expected higher growth in the coming period, the government should be able to raise the resources to meet the fiscal deficit target.

It was a good move by the FM to introduce measures to improve tax compliance. Steps such as (i) reducing the time limit of reopening proceedings to 3 years from 6 years for concealing income of less than ₹50 lakh (ii) pre-filling of income from capital gains, dividend income and interest from banks and (iii) exempting citizens above 75 years who earn their income solely from pension and bank interest will encourage more people to file their returns, thus increasing the tax base.

The government is well aware that apart from protecting lives, creating livelihoods is critical. Hence, the push on the National Infrastructure Pipeline and the Production Linked Incentive Scheme for manufacturing companies and monetisation of public infrastructure assets, will create livelihoods as these sectors are job machines. This move also ensures that government spending is pushed in the right direction.

The proposed privatisation of two PSBs and one general insurance company shows the government’s commitment to continual reforms, and will help in improving the performance of some of the struggling PSUs. In a similar vein, increasing the FDI limit from 49 per cent to 74 per cent for insurance companies, will help insurers to attract additional foreign capital to expand their business across India. Insurance penetration in India is only 3.7 per cent of the GDP with a tremendous potential to grow.

A growth-oriented Budget

Another positive is the announcement of an asset reconstruction company and asset management company to consolidate and takeover existing debt. This move will help financial institutions that are struggling to raise capital and impairing their ability to lend. India’s low bank credit growth of sub-7 per cent is a function of risk aversion on a part of borrowers and also the NPA woes of banks. However, the implementation of a ‘bad bank’ will be key and will be closely monitored.

The government is continuing to focus on affordable housing. The government has recognised this inherent demand and has extended the additional deduction of ₹1.5 lakh for loans taken till March 31, 2022, for purchase of an affordable house.

Overall, the Budget is growth-oriented and aims to set India on the right course.

COMMENT NOW