Union Finance Minister Nirmala Sitharaman

A bold and reformist budget

The Budget is one of the most awaited events on the economic calendar and this year’s Budget certainly did not disappoint. With a series of bold, reformist measures, the Budget seems to signal a clear shift of focus from fiscal consolidation to growth orientation. If this reformist zeal continues, with further focus on technology, innovation, financial sector reforms, and maximum governance with minimum government, India could easily be the fastest-growing global economy over the next five-eight years and could aspire to becoming a $10-trillion economy at the beginning of the next decade.

The Budget posed a classic dilemma for the government: whether to appease the fiscal hawks and credit rating agencies or go all in on spending to accelerate the V-shaped recovery, realigning the focus on asset creation. With a fiscal deficit pegged at 6.8% for FY22, the government has clearly chosen the growth path.

Notably, the finance minister has ramped up capital expenditure to ₹5.54 lakh crore for FY22 (34.5% higher than FY21). This includes a huge spur to achieving the goals of the National Infrastructure Pipeline for brownfield infrastructure assets and significant new allocations for railways, highways, metro systems, and public buses on a PPP model.

Healthcare spending has been increased to ₹2.25 lakh crore (a 137% increase over FY21) which includes significant spending beyond the Covid-19 vaccine. With a healthcare spend at 1.2% of GDP, India can finally look to modernising its healthcare infrastructure and invest in the long-term well-being of its citizens. This expenditure should go a long way in restarting a virtuous cycle of spending, asset creation, job creation, and increased consumption, moving India closer to 8%-10% annual GDP growth.

Coming to reforms, delicensing power distribution to make the sector more competitive and undo current monopolies is certainly a progressive move. Moreover, the scheme has enhanced investment towards automation in metering and billing, which should do much to resolve problems involving electricity defalcation and lack of transparency. The push towards making futuristic technologies mainstream, e.g. using green hydrogen to manufacture ammonia, and the announcement of a National Hydrogen Mission should help guarantee energy security in India.

Creating a ₹20,000-crore development finance institution as an enabling mechanism for the banking sector will mobilise the funding needed for world-class infrastructure. The Budget briefly alluded to the privatisation of two public sector banks without naming them. It would do well to consider privatising healthy, competitive banks such as Punjab National Bank and Bank of Baroda. The relaxation of FDI limits in insurance and a move towards privatisation, including the LIC IPO, should give the Indian insurance sector the fillip it needs to insure more lives and provide funds for infrastructure projects.

Along with banking, the automotive sector is a barometer of sustained economic revival, and the vehicle scrappage policy could give it a huge fillip. This should curb environmental pollution while driving new vehicle growth. The fine print is yet to be deciphered but we believe that the effectiveness of this policy would be enhanced if all vehicles, particularly government-owned ones, were made part of the initiative.

While the much talked about Covid-19 cess didn’t make its way into the Budget, keeping the tax rates unchanged despite a fiscal deficit was a welcome surprise. The government did announce a few measures to simplify taxation such as pre-filling of capital gains in the income tax return, return filing exemption for senior citizens above 75 years of age, and simplified advance tax payments on dividends.

So, what are the misses in Budget 2021? For starters, a detailed funding allocation and road map for bank recapitalisation is still awaited. The Budget also missed an important opportunity to fund the Digital India drive, notably digitisation of MSMEs and data localisation measures. A focussed funding of futuristic technologies such as artificial intelligence, blockchain-based tracing, and quantum computing could have strengthened India’s international position and made its supply chain and manufacturing globally competitive. Startups are a significant determinant of India’s growth and the mere extension of the tax holiday by a year and scrapping the requirement for a GST audit aren’t enough to catalyse this sector. To kick-start investments, the government could become an anchor customer for piloting new technologies and drive technology adoption in MSMEs by providing seamless funding through the Small Industries Development Bank of India. The journey towards direct and indirect tax simplification seems to have slowed and there’s still a long way to making India’s tax system comparable and competitive with that of other emerging economies, particularly our ASEAN neighbours.

In summary, the government clearly took advantage of the fact that India has one of the lowest debt-to-GDP ratios and leveraged the fiscal reprieve provided by the V-shaped recovery to refocus on asset creation and private capital attraction in infrastructure, healthcare, banking, automotive, and power. Since the first wave of big reforms in the 1990s, India’s economy has proceeded in fits and starts. This Budget finally marks a renewed resolve to take the big steps needed to create a fast-growing, vibrant economy.

Views are personal. The author is managing partner & CEO, Arthur D. Little, India and South Asia. With inputs from Utsav Patodia, business analyst, Arthur D. Little.

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