Achieving Pareto Optimality

Madan Sabnavis | Updated on: Feb 02, 2021
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With fiscal curbs off, the FM had more leeway to spend

Achieving Pareto Optimality in a Budget is often hard — a situation where no one is worse off, and some are better off. This has been attained by the Finance Minister this time because one of the prime constraints which was expected to be the overriding factor — fiscal consolidation — was not on the agenda.

Hence, by budgeting a fiscal deficit number of 6.8 per cent, which though lower than the 9.5 per cent for FY21, would take at least three years to go down past the 4.5 per cent mark, a lot of room has been given for drawing up the content. Intuitively such a policy can be persevered with for at least another two years, which will help to restore growth. Tongue-in-cheek, it can be asked, why was this not done in FY21 if fiscal consolidation was not a consideration?

The government has worked on the principle of expenditure stimulus through higher outlays on capex of ₹5.54-lakh crore to provide the backward linkages with industry and hence create some jobs while leaving the tax structures generally unchanged. This can come as a relief to individuals who feared a Covid cess though the absence of any relief also means that there is no direct stimulus to consumption. But in the broader frame, this does not matter.

The plus point for the Budget is that the revenue numbers look more realistic and hence achievable. All the revenues on tax and non-tax have been projected at lower levels than the FY21 (B) number even while they have operated on a similar GDP base of around ₹223-lakh crore.

Hence, revenue receipts at ₹17.88-lakh crore for FY22 is lower than ₹20.20-lakh crore which was projected in FY21 (B).

Divestment push

On disinvestment, the government is still aggressive without being obtrusive as the number of ₹1.75 lakh crore is lower than the ₹2.1-lakh crore projected last year. However, the menu has been widened, and it will be interesting to see if Air India, BPCL, LIC, two PSBs and a general insurance company will actually be on the shelf along with others.

The fact that the Finance Minister spoke of strategic sale means that it could be possible as the offering need not be for the public. This may be one reason why the stock markets have cheered the Budget.

This happy situation can, however, be irksome for the bond market as the plan to have gross borrowings of ₹12-lakh crore is large and with the States also being given width to expand their deficit to 4 per cent of GDP with an additional 0.5 per cent as conditional allowance means there will be a lot of paper in the market.

This means that the RBI will have to be busy to ensure that liquidity is available and that commercial demand for credit is not impeded in any way. Therefore, there would be some pressure on interest rates and the RBI has to get back into action to ensure that liquidity is in balance all the time.

The significant measures for the financial sector, which though in the nature of announcements rather than major allocations also help to assuage the lingering doubts that followed the RBI’s FSR released in January.

First, the creation of an ARC is akin to the bad bank concept and this will help to transfer the NPA burden of PSBs. Second, creating a DFI was always on the cards and here too the initial investment of ₹20,000 crore is a positive step. It would be interesting to see which other investors would chip in to drive this initiative.

While the concept of a DFI is good, the model was abandoned in the early part of the century as it was not viable. Hopefully, this would have been thought through before making this announcement.

Lastly, the bank recap measures through recap bonds were also expected. The amount of ₹20,000 crore should be seen along with the ARC which together will help strengthen the system. In fact if this can be expedited, the proposed sale of the three banks can be successful.

Hence the Budget does give positive signals for growth and the approach can be interpreted to hold for the next couple of years too, and can help to stabilise and grow the economy.

The writer is Chief Economist, CARE Ratings. Views expressed are personal

Published on February 02, 2021

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