The Union Budget 2021 will be presented under challenging circumstances as the economy continues to reel under a ‘technical recession’. India’s resilient fight against the Covid-19 pandemic does offer a glimmer of hope for revival, provided it can successfully avert any second wave of Covid-19.

The RBI Bulletin of January reports that India’s recovery rate has been the second-highest globally, and the mortality rate at 1.4 per cent (the second-lowest among countries with over a million infections) has been lower than the world death rate (2.2 per cent).

While India has fared better in managing the infection and fatality rates of Covid-19 compared to countries with better per-capita income levels and access to healthcare facilities, the same appears to have been achieved by sacrificing economic growth over the past year — as protracted lockdown since March has severely affected economic activity across sectors, exacerbating the problems of unemployment, poverty, and inequality.

To complicate matters, the scope of fiscal policy interventions to resuscitate growth shall be considerably reduced as India’s high fiscal deficit — estimated to more than double from the budgeted deficit of 3.5 per cent in FY20 to 7.5 per cent in FY21 — shall mean lack of fiscal headroom to undertake expansionary policies. To add to the woes, both headline and core inflation continue to remain high and sticky, implying a lower probability of coordination between monetary and fiscal policies in the days ahead.

Focus areas

So, what should the upcoming Budget focus on?

First, given the lack of fiscal space to enact further tax cuts, the government will do well to implement the tax reforms and related stimuli that it has already set in motion, to improve consumer and business sentiments. Since October 2020, salaried individuals have been provided with an option to use LTC amounts to buy specified assets. It may be a good idea to extend the scheme’s benefits for a couple of years more to stimulate consumption expenditure.

The new personal tax regime introduced last year that eliminated most deductions under Section 80C, is unlikely to be abandoned in favour of the old scheme. Since the new tax regime does not provide a deduction benefit on specified investments, a temporary scheme may be started where the taxpayers may avail themselves of a “tax exemption voucher” up to their investment amount in small savings like PPF to claim deductions in FY22. It will encourage savings and provide the government with much-needed funds.

Second, the Budget needs to provide a strong impetus to infrastructure spending, which, under the current circumstances, may be the best bet to boost employment and income, particularly for households who have been worst hit by the pandemic. Fiscal constraints notwithstanding, larger capital expenditures in infrastructure can kickstart a multiplier process through a virtuous consumption-production-employment-income cycle, which could trigger automatic stabilisation of fiscal deficit driven by better tax buoyancy.

Additionally, the Budget should outline a roadmap to bring its disinvestment plans on track, and redirect the resources generated to provide a fillip to investments planned under the ambitious National Infrastructure Pipeline (NIP). The high valuation of the market makes this time ripe for such disinvestments.

Third, reports suggest that import duties on more than 50 items (electronic devices and smartphones, furniture, and electric vehicles) may be hiked by 5-10 per cent, consistent with the government’s clarion call for Atmanirbhar Bharat . Since work-from-home arrangements are likely to continue as mainstream strategies for certain industries, a hike in import duties on electronic items will affect consumption and productivity in key sectors like IT and related services, and education.

Further, such a step may hurt the domestic industries too. For India, a higher import tax shall tantamount to a higher export tax, since the import intensity of India’s total goods and services export is about one-third, and is over 50 per cent for manufacturing exports. Import Substitution 2.0 policies are likely to have counterproductive effects considering the high import-intensity of India’s exports.

The Budget should rather support trade facilitation measures to increase India’s total trade. At a juncture when domestic engines of growth are dormant, improving India’s competitiveness in global markets shall be critical to drive external demand for our goods and services.

Fourth, improving the business ecosystems for MSMEs should get due attention as the sector accounts for about 40 per cent of overall exports, and has high employment elasticity of growth. Thus, the Budget should take steps for rationalising the GST structure, ease compliance requirements, and provide direction towards inclusive labour and land laws in the country.

The Budget should reflect a judicious mix of demand- and supply-side interventions so that the green shoots of recovery can be sustained over the long-run.

The writers are Assistant Professors,

IIM Ranchi