Budget 2021: A Break From The Past, But Status Quo Too
Nirmala Sitharaman, and other members of the Finance Ministry leave North Block, in New Delhi, on Feb. 1, 2021. (Photographer: T. Narayan/Bloomberg)

Budget 2021: A Break From The Past, But Status Quo Too


In line with the Economic Survey, the government chose to look ahead and not be tied down with the pandemic that hurt Indian growth last year.

This was an economy- and market-friendly budget because it reflected a change in mindset and a bet on growth that we had not seen from this government to this extent previously. It is willing to tolerate a higher fiscal deficit till private sector growth picks up.

Fiscal consolidation has been the mantra of this government over the past six years. This budget is transformational as it cast aside the shackles of the Financial Responsibility and Budget Management Act that helped bring discipline to the government’s deficit over the years but also constrained the government in taking on aggressive spending to boost growth or to counter an economic slowdown.

If a bet has to be taken on prioritising growth over controlling the fiscal deficit, this is as good as time as any. The economy should anyway be strong with GDP growth in double digits in 2021-22 due to easy comparison with Covid-19 times. It is thus easier to reinforce animal spirits by providing a further growth push rather than to try and do this when economic participants are otherwise morose and hesitant to invest. Foreign investors are keen on investing in India and in emerging markets. Interest rates are low.

Due to Covid-19, investors are now prepared for large government deficits across the world and few are really focusing on the deficit number as long as there is a credible glide path and assumptions about revenue/taxes, etc. are realistic.

In short, global and domestic markets are willing to give time for fiscal consolidation and the government has gracefully accepted the opportunity.

Although the fiscal deficit numbers look much higher than expected, the market (and hopefully rating agencies too) have taken it in stride. Consolidated fiscal deficit (centre and states) may be as high as 14% in 2021. The government is also taking this opportunity to clean its books and bringing many off-budget deficit items into the formal budget. This move towards transparency also means that the real increase in the budget deficit is lower than what it looks optically as dues to agencies like the Food Corporation of India were always part of the government’s expenditure, whether appropriately recorded or not.

Privatisation of two public sector banks, one public sector insurance company, and listing of Life Insurance Corporation of India are key milestones to look forward to.

In fact, selling a large, consistently profitable company like Bharat Petroleum Corp. is philosophically tougher than selling a state-owned bank.

The government owns a number of banks and selling off one or two of them can be more easily rationalised on the basis of their financial performance. Completion of previously announced transactions in BPCL and Air India will be very strong signals and therefore completing these privatisations (as opposed to the usual divestments on the stock exchange) would significantly increase the credibility of the programme and buy the government more time.

Another important takeaway from the budget was the change in the quality of government spending to reach the same level of overall expenditure. In the current year (2020-21), the government was forced to increase its expenditure on ‘pandemic related’ allocations. Keeping the overall expenditure largely stable in 2021-22, the government is replacing pandemic help and subsidies with higher allocations to infrastructure and healthcare. A longer glide path to pre-Covid type fiscal deficit numbers (projected now for 2025-26) means that government and markets now have visibility for government spending for the next five years.

The government also adopted the wise strategy of “when there’s nothing to do, do nothing”. Even though the budget signaled new thinking where that was appropriate, it stayed with the status quo where that made more sense. The government resisted the temptation of levying a ‘Covid Tax’ and its commitment to have a stable tax regime and consequently no hike in any taxes for consumers or investors (or even on cigarettes and ITC Ltd.) clearly reassured the markets.

The Finance Minister also pleased the markets with many other announcements and initiatives. There were no ‘fine print’ related negative discoveries, as has been the case many times in the past.

Economists and analysts have generally been pleased with the level of transparency and the reasonableness of assumptions used to estimate next year’s revenues.

Now, government has to focus on the implementation of its budget announcements, corporates have to figure out how and when to implement their own growth plans to take advantage of the expected growth in the economy and we have to concentrate on what stocks to buy.

Samir Arora is Founder and Fund Manager, Helios Capital Management.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.

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