Ray of Hope for Financial Sector but Proposals Depend on Imponderables

WITH an admission of a large fiscal deficit, the Indian economy is showing a contraction for the third time in our recent history. An uncertain future is looming as the pandemic is still active. A vaccination programme has been just launched. In this scenario, it looks as if this is the best bargain of a budget that the country could have looked at.

It is good because it is somewhat boring. This is good because it is not attempting large ambitions. It is good because it has retained a stable tax structure. It has placed faith in India growing.

But one interesting aspect of this budget is that it attempts monetisation and “financialisation” of vast segments of the economy that can have critical implications for the financial economy of the country.

Watch: Union Budget 2021-22: Another Step Towards Privatisation

First, the government finances would have to pervade influence on the entire economy. This to a large extent sets the pace of the economy. In the context of the pandemic when the overall activity was hit and GDP contracted, and, the government’s take by way of taxes also hit the bottom, the finance minister has chosen to spend. The finance minister chose to retain this level of fiscal deficit. Not trying to squeeze the expenditure low would have been counter-productive.

India’s fiscal deficit is set to jump to 9.5 percent of GDP in 2020-21 as a revised estimate. This is sharply higher than the 3.5 percent of GDP that was projected in the budget estimates.The government plans to borrow another Rs 80,000 crore to fund the deficit this year. Gross market borrowings for next year has been pegged at Rs 12 lakh crore. A new roadmap for fiscal consolidation has been announced in the budget. The budget is saying a lot of the additional funds would be spent on capital expenditure.

The finance minister is talking about monetising the government’s assets like handing over national highways, airports, ports, and what not into the hands of private players on a Public Private Partnership basis and raising fresh funds. That is, what is happening is converting idly held assets in the hands of the government.

It is good that the finance minister is not overly bothered about how the international rating agencies would react to the rising fiscal deficit. Questions have been raised why despite such large government expenses and augmented expenditure as pump-priming for the economy,  why India’s GDP contracted comparatively to other peer countries.

 

Source: Theleaflet