Beware the many slips between cup and lip

N Madhavan | Updated on February 11, 2021

What all can come in the way of Budget 2021-22 accelerating India’s economic growth

Every Budget has a vision. Finance Minister Nirmala Sitharaman was clear on what she wanted to achieve as she presented her third Budget on February 1 — create the conditions and impart the necessary impetus for the economy to shrug-off the pandemic and accelerate its growth. She did this by presenting a Budget with a clear direction, high on transparency and conservative in assumptions.

In line with the economic ideology a right-of-centre party would typically adopt, she eschewed hand-outs and opted to revive growth by increasing capital spending and giving a massive push to infrastructure development. Reforms were taken forward. A conscious decision was taken to go slow on fiscal consolidation with the priority being economic growth. This helped her avoid levies that could have otherwise vitiated the investment climate that the Budget sought to create.

Not surprisingly, the reaction to the Budget was euphoric. The stock market celebrated, the industry was elated and the opposition found it quite hard to trash it. But delivering the Budget is only half the job. Ensuring that it delivers on its vision is another matter altogether.

Recall P Chidambaram’s Dream Budget of 1997. He set out to achieve a rapid and a broad-based growth. To do so, he reduced income tax rates for individuals and companies. Peak customs duty was reduced, excise duty rationalised, Minimum Alternate Tax was simplified and import duty cut. Tax on dividends was removed. More industries were de-licensed. A Voluntary Disclosure of Income Scheme was launched and the stage was also set for India’s first PSU divestment.

The stock market shot up by as much as 5 per cent on the day of the Budget. However, Chidambaram’s hope of increasing compliance by reducing taxes failed to materialise. Revenues fell, expenditure was way off the chart, GDP growth dropped to 4.5 per cent in 1997-98 from 7 per cent the previous year (though the Asian Financial Crisis also contributed to this) and unemployment rose. In the end, the moniker ‘Dream Budget’ turned out to be totally out of place.

What can possibly go wrong with Nirmala Sitharaman’s assumptions?

Private investment

The Budget has set the conditions for a faster pace of economic growth. The Centre has also allocated funds for it. But these factors alone won’t catalyse faster economic growth. The private sector has to play ball. Will it? With capacity utilisation in low 60s (per cent), the industry is in no mood to start investing. This, even after most companies have de-leveraged their balance-sheets. They typically take a decision to expand once utilisation levels top 80 per cent or more. That may take a few more quarters.

Even in the case of infrastructure projects such as roads, the funding is not done just by the Centre. Investments have to be made by the States and the private sector. States’ finances cannot be worse. FM and her team have to keep a close watch on the execution part of the infrastructure pipeline.

Credit growth

The reason India saw a massive increase in private investments in the 2000-07 period was more money chasing fewer projects. Today, bank are reticent to lend. When bank credit growth is less than the nominal rate of growth of the economy, GDP growth is unlikely. Will banks rise to the occasion and start lending when the demand for fund manifests?

They are not yet out of the woods when it comes to sticky loans and Covid could complicate matters on that front. Will the government’s budgeted re-capitalisation amount of ₹20,000 crore be enough?

The plan to set up an Asset Reconstruction Company (ARC) or a bad bank may help banks shed bad loans and focus on lending. But much will depend on how it is structured and to what extent it is capitalised. ARCs have existed in the country before with limited success.

The same can be said about Development Finance Institution. A lot of thinking has to go into its structure, operations and the checks and balances for it to be effective.

All this may take time to evolve.


India has had two consecutive years of good monsoon. Private weather forecaster Skymet has predicted a normal South-West monsoon this year, too. But history is stacked against us.

The last time, ever since 1871 from when records are available, the country had three years in a row of good monsoon was in 1894. That was a good 127 years ago. If the rains are below normal this year, rural consumption will slow, hurting demand revival. That apart, food inflation will rise forcing the Reserve Bank of India to reverse its ‘accommodative’ stance and, worse, even start raising rates. That would smother the economic recovery.

The government, which has reduced the allocation to the rural sector this year, will be forced to spend more to provide relief. That could push up its borrowings.


The flip-side of a borrowing-led growth is the risk of government crowding out private players and causing interest rates to rise.

The government’s ₹12-lakh-crore borrowing plan for FY22 is already high and if that increases, say, due to a monsoon failure or shortfall in divestment target (₹1.7-lakh crore assumed for next fiscal, while lower than ₹2.1-lakh crore in FY21, is still pretty steep going by past records), will push up the borrowing cost for the private sector if and when they start investing aggressively.

However, the extent of crowding out will depend on how conservative the Budget’s revenue projections are (experts see scope for higher revenues) and India Inc’s ability to borrow overseas taking advantage of the stable rupee.

Thus, a lot will depend on how effectively the government implements its Budget proposals and how lucky it is when it comes to unforeseen developments including a second wave of Covid or a geo-political crisis.

If all goes well, Budget 2021-22 could well deliver on its vision and possibly qualify to be called a ‘Dream Budget’.

Published on February 11, 2021

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