The announcement of the Union Budget of India is one of the most crucial events of the year. The Union Budget is both remarkable and unprecedented because it has the potential to steer the direction of the giant Indian Economy towards recovery and progress. MBA aspirants will also be aware that the Union Budget is a key topic that is likely to be raised in the crucial personal interview round of the b-school admissions process. In this article, we try to make sense of the Union Budget of 2021 by going over some key highlights from the event!
A question that may be raised in an MBA interview could be around the merit of Budget 2021 as a solution to the ailing Indian Economy in light of the goals of achieving higher employment growth and higher productivity growth.
According to Mckinsey & Company, India needs a mix towards higher productivity sectors that also have the potential to create more jobs. Second, and more importantly, within individual sectors, India needs a move towards new business models that use global trends to increase productivity and stimulate demand. So, does the Union Budget 2021 do justice to these propositions and offer an effective course of action to set the Indian Economy on a course of economic growth?
Let’s dive in!
Gross Domestic Product
India has had an average annual Gross Domestic Product (what is GDP?) growth rate of 6.8 percent ever since the 1990s. In that context, going negative with a 7.7 percent contraction this year is disappointing. However, a major reason for a contraction of this magnitude has been the disruption caused by Covid-19 induced lockdowns which saw the economy contract by almost 24 per cent in the first quarter and finally led to a technical recession (
what is a technical recession?).
The Economic Survey 2020-21 predicts a V-shaped economic recovery due to the mega vaccination drive, rapid recovery in the services sector, active government spending, and robust growth in consumption and investment due to resurgence in high frequency indicators such as power demand, rail freight, E-Way bills, GST collection, and steel consumption. The IMF predicts that India will become the fastest growing economy in the next two years despite the 7.7% contraction in GDP.
Fiscal Deficit
A fiscal deficit is a shortfall in a government's income compared with its spending. Essentially, a government that has a fiscal deficit is spending more than it earns by borrowing money.
India started this fiscal year with a target of keeping the budget deficit to 3.5% of GDP. However, by the end of November 2020, fiscal deficit surged to a high of 9.5% of GDP to Rs 10.75 lakh crore, which is equivalent to 135.1 per cent of the 2020-21 Budget Estimates. This is an outcome of the double impact of the COVID-19 pandemic — low government revenue due to the lockdown and negative economic growth coupled with high government spending to provide essential relief to vulnerable sections of society and a stimulus package aimed at reviving domestic demand.
Finance Minister Nirmala Sitharaman has pegged fiscal deficit for 2021-22 at 6.8% of GDP and aims to bring it back to 4.5% by 2025-26.
“The government has indicated it is willing to borrow significantly more than FRBM (Fiscal Responsibility And Budget Management Act requires the government to limit the fiscal deficit to 3% of the GDP) targets currently allow, primarily for capital expenditures focused on physical infrastructure,” said D.K. Srivastava, chief policy advisor at EY India and a member of the Advisory Council to the Fifteenth Finance Commission.
“There are no additional taxes or funding mechanisms, so the government expects this will be financed through normal growth of GDP, through a virtuous cycle where the increased expenditure will reflect in growth. The only other revenues expected are from the monetization of assets and disinvestment. If the economy normalizes, this path should be feasible. There are signs that the economy is normalizing, however, this is contingent upon another wave of Covid-19,” he added.
Employment, Skill Development, and Education
India’s unemployment rate climbed to a six-month high of 9.06% in December, according to the Centre for Monitoring Indian Economy (CMIE). The unemployment among urban youth (age 15-29 years) is alarmingly high at 22.5 per cent.
According to the UN, “productive and formal employment generation depends on the availability of an adequately skilled labour force through sustained investments in skills development and fostering opportunities for decent job creation through entrepreneurship.” The proportion of formally skilled workers in India is extremely low, at 4.69% of total workforce, compared to 24% in China, 52% in the US, 68% in the UK, 75% in Germany, 80% in Japan and 96% in South Korea.
“We need to incentivize companies and industrial units to provide internship and on site vocational training to unemployed youth. This combined with distance education growing amidst the pandemic could equip the youth with both knowledge and skills necessary to obtain employment,” said Professor Ram Singh of Delhi School of Economics.
Although the sum of 93,224.31 crore for the Ministry of Education this year is lower in comparison to last budget’s allocation of Rs 99,311.52 crore, the budget seems promising in facilitating youth employment.
On the skill development front, the Finance Minister proposed to amend the Apprenticeship Act and realign the National Apprenticeship Training Scheme for post-education apprenticeship, training of graduates and diploma holders in engineering, setting aside over Rs 3,000 crore for this purpose in the Budget.
She announced the setting up of a Higher Education Commission of India, 100 new Sainik schools and a central university in Leh.
She also stressed the need to increase collaboration with foreign institutions and strengthen over 15,000 schools as per the National Education Policy (NEP).
The proposal to implement Data Analytics, Data Science, Artificial Intelligence and Machine Learning to upgrade the functioning of the Ministry of Corporate Affairs was welcomed by industry players.
Notably, the finance minister said that an initiative is underway in partnership with the United Arab Emirates to benchmark skill qualifications, assessment, and certification, accompanied by the deployment of certified workforce. The moves to join forces with UAE to benchmark skill qualification and to introduce collaborative training programs with the Japanese workforce have been lauded by the industry. This will help us keep our skilling endeavours in sync with global trends, they remarked.
With an unemployment rate of 10.99 per cent in June 2020, the results seem far away, especially given the time needed to execute the propositions made in the budget. However, steering the economy in the direction of skill development seems to be a step in the right direction.
Inflation
Inflation refers to the rise in the prices of goods and services of daily use such as food, clothing, housing et cetera. The pandemic created an imbalance in the supply and demand of many goods and services. This increased costs for many service providers. With reviving demand, economists expect services providers to pass this burden of increased costs to customers which would lead to higher prices.
Economists at HSBC Securities and Capital Markets (India) Pvt. Ltd pointed out that service providers tend to raise prices once a year. This was not possible in 2020. They may raise prices for two years together in 2021. Large firms and high earners have done well through the pandemic. They have a wall of savings that they are now spending. Consumption patterns show that those with high incomes consume more services than goods. And that could be inflationary.
Investments
The Budget seems to offer an ambitious plan for disinvestment. Disinvestment means the sale of assets such as Public Sector Enterprises or other projects by the government.
The Finance Minister announced a $23bn disinvestment target for the year. The government plans to sell off the debt-laden national carrier, Air India, by the end of financial year 2021-22. Two public banks and an insurance company will also be privatised, among others.
The downturn in the economy has meant that the government may struggle to meet its revenue collection targets. The privatisation push not only helps generate revenue but is also in line with the Modi government's reform agenda. The government has been aiming at creating value in PSUs through strategic disinvestment and transfer of control.
Foreign Direct Investment (FDI)
The Indian government on Monday said it plans to raise limits on how much foreign companies could invest in the country’s insurance industry, a move that could attract inflows from U.S. and European insurers. The government would allow FDIs of up to 74% in insurance entities, up from 49% currently, clearing the way for “foreign ownership and control with safeguards”. A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country.
The take up of life and health insurance products is low in a country of 1.3 billion people but is expected to grow. Invest India expects the insurance market to be worth around $250 billion by 2025.
In a statement to Reuters, lobby group U.S.-India Business Council (USIBC), part of the U.S. Chamber of Commerce, said New Delhi’s decision will help American insurance companies enhance financial inclusion in India. “For foreign investment to flow, though, management and control regulations need to strike the right balance between prudent safeguards and owners’ needs,” said Nisha Biswal, President of the USIBC.
State-run Life Insurance Corporation dominates India’s life insurance market, but private players have rapidly grown in size.
Manufacturing, Services, and MSMEs
The Finance Minister proposed an extension of the tax holiday to startups to March 31, 2022 during her Union Budget 2021 address. To incentivise investment in startups, the government is proposing extending the eligibility period of claiming capital gains exemption for investment made in the startups to March 31, 2022.
She also proposed allocating INR 1,500 Cr to increase the penetration of digital payments throughout the country and other measures to boost financial inclusion.
The Finance Minister has proposed to set up a “world-class” fintech hub near Gujarat’s capital Gandhinagar at GIFT City (Gujarat International Finance Tec-City).
To ensure credit flow under the scheme of Stand Up India for scheduled castes and tribes and women entrepreneurs, the government will reduce the margin money requirement from 25% to 15%, and will also offer loans for activities allied to agriculture.
The Finance Minister introduced a production linked incentive scheme (PLI) for large-scale electronics manufacturing which will provide incentives to producers. Under the scheme, eligible players will receive incentives ranging from 4 - 6 percent of production value for five years, after they achieve their investment and production value target for each year.
The scheme is likely to attract global players in the manufacturing sector and make India globally competitive by attracting investment. The scheme also aims to incentivize local companies to set up or expand existing manufacturing units across the country. The step is significant for India’s manufacturing sector at a time when it faces a crisis induced by the coronavirus pandemic. The scheme is expected to cut down import bills, reduce dependency on China along with showing potential for absorbing our growing workforce.
The highlight for the MSME sector has been the increase in the proposed capital expenditure of ₹15,700 crore for the MSME sector, double the capital expenditure prosed in the budget of 2020-2021.
The customs duty on semis, flat, and long products of non-alloy, alloy, and stainless steels for the benefit of the MSMEs hard hit by the pandemic has been reduced to 7.5 per cent.
"To provide relief to metal recyclers, mostly MSMEs, I am exempting duty on steel scrap for a period up to March 31, 2022," the Finance Minister said.
To incentivize exporters of garments, leather and handicraft items that are primarily made by MSMEs, the budget rescinded exemptions on imports of some types of leathers as they are manufactured domestically.
The Finance Minister also announced the creation of a framework for MSMEs for faster debt resolution.
Infrastructure
The overall spending on infrastructure in this budget is up sharply by 35%. A new Development Finance Institution (DFI), with a starting capital of more than INR 19000 Cr, will be set up to help fund large-scale infrastructure projects. This is expected to kickstart spending and offer some relief to banks, which are reeling from a mountain of debt.
The proposed DFI will be used to finance social and economic infrastructure projects identified under the National Infrastructure Pipeline (NIP), which was launched with 6,835 projects and has expanded to 7,400 projects. Around 217 infra projects worth Rs 1.10 lakh crore have been completed. The earlier DFIs, like ICICI and IDBI, later converted into universal banks to get access to public deposits. However, with banks finding it difficult to finance long-gestation projects and with the general decline in long-term infra funding after the collapse of IL&FS, a need has been felt to set up a government-backed DFI.
On the DFI, Sitharaman said: “A professionally managed Development Financial Institution is necessary to act as a provider, enabler and catalyst for infrastructure financing. Accordingly, I shall introduce a Bill to set up a DFI. The ambition is to have a lending portfolio of at least Rs 5 lakh crore for this DFI in three years time.”
Economists say that the investment needs to be front loaded. Bidding and contracting for roads, highway, railway tracks and urban development projects is a lengthy process so rather than rolling out new projects, the focus should be on raising funding for the awarded projects in order to complete them as soon as possible.
The multiplier effect refers to the theory that government spending intended to stimulate the economy causes increases in private spending that additionally stimulates the economy. In essence, the theory is that government spending gives households additional income, which leads to increased consumer spending.
Economists expect the multiplier effects of infrastructure investment on growth and employment. They predict a boost to the economy through the multiplier effect which will help other ancillary sectors and create jobs.
Non-Performing Assets
A non performing asset or NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
The Government and RBI expect NPAs or bad loans to rise as many borrowers are expected to delay repayments in the wake of the economic slowdown. The NPAs in the banking sector are expected to shoot up to 13.5 percent of advances by September 2021 from 7.5 per cent in September 2020.
In the Budget, the Finance Minister announced the creation of an asset reconstruction company/asset management company (ARC/AMC) (a bad bank) to park the bad assets of commercial banks and then sell those at a discounted price in the market to help clean up the balance sheets of commercial banks. NPAs totaling Rs 899,803 crore as of March 2020 is likely to be transferred to the bad bank.
The move comes as a relief for banks hit by rising bad assets and a slow loan off-take during the pandemic. However, several experts cautioned that the move would encourage banks to continue with reckless lending practices, the same culprit that payed its part in the 2008 Housing Bubble in the US.
Healthcare
India, which has the world’s second-highest coronavirus caseload after the United States, currently spends about 1% of GDP on health, among the lowest for any major economy. However, in budget 2021, Health spending is up by 137%, a massive boost for India's long under-funded health sector receiving just about 1.3% of GDP.
More than INR 61000 Cr have been earmarked to upgrade healthcare infrastructure at the primary, secondary and tertiary level over a period of six years. The government has already committed another INR 3500 Cr to India's Covid vaccination programme, the world's largest drive, which will extend to more than 1.3 billion people.
Economists say it would bring the much-needed investment into the economy and help ease fears about Covid-19, which has been weighing on spending and investment for about an year.
Agriculture
Economists claimed that the budget needed to focus on reviving demand. Rural India — especially the small and marginal farmers, the landless labour — spends most of its income on a wide range of goods and services. So, an increase in disbursements through PM-KISAN and MNREGA would provide a much needed boost to demand.
However, the budget allocation for the Department of Agriculture, Cooperation and Farmers Welfare was slashed 8.5% in 2021-22. The flagship PM-KISAN scheme, meant to provide income support to farmers, saw a 13% drop in its budget, which is ₹10,000 crore lower than last year’s initial allocation.
The Finance Minister allowed State-run Agricultural Produce Marketing Committees (APMCs) to access the ₹1 lakh crore Agriculture Infrastructure Fund (AIF) created last year as part of a COVID-19 stimulus package to provide subsidized financing to projects by primary agriculture cooperative societies, farmer producer organizations, agriculture entrepreneurs and start-ups to develop cold chain storage and other post-harvest management infrastructure.
However, these claims have failed to reassure protesting farmers who demand a repeal of the three agrarian reform laws that they fear will lead to the collapse of the APMCs and weaken the system of government procurement at MSP rates, leaving them with meagre earnings and at the mercy of corporate players.
“If you introduce laws to weaken the APMC system, then what is the point of giving APMC mandis access to an Agriculture Infrastructure Fund,” one of the protestors said.
The Finance Minister announced an Agriculture Infrastructure Development Cess to be levied on petrol, diesel, gold and other imports, to improve facilities for production, conservation and processing of farm produce and thus “ensure enhanced remuneration for our farmers.”
Operation Green Scheme to boost value addition of tomatoes, onions and potatoes is being expanded to cover 22 perishable crops. A Rural Infrastructure Fund allocation is being hiked from ₹30,000 crore to ₹40,000 crore. The Micro Irrigation Fund’s corpus is being doubled to ₹10,000 crore.
However, farm advocates were not impressed, noting that schemes to provide a remunerative price for farm produce, such as PM AASHA and the Price Support Scheme have seen budget cuts of 20-25%.
“We had also demanded that the real cultivators including tenant farmers, sharecroppers, women farmers and adivasi farmers, who may not have the land patta, should be included in this scheme,” said Kavitha Kuruganti, a leader of the Mahila Kisan Adhikaar Manch who has been part of the negotiating team for the protesting unions.
Jai Kisan Andolan convenor Avik Saha said, “According to the Economic Survey data, nothing has yet been spent out of the Agriculture Infrastructure Fund of ₹1 lakh crore or the Animal Husbandry Infrastructure Fund of ₹15,000 crore, although they were supposed to have been part of the COVID-19 stimulus package.” Out of the ₹1 lakh crore, only loans worth ₹2,991 crore received “in principle sanction” as of mid-January 2021. “While big figures are announced in the name of the infrastructure funds, these are actually not budget allocations, but simply notional funds which are meant to finance projects through loans,” he added. Former Food and Agriculture Secretary T. Nanda Kumar agreed that the challenge was implementation.
“Infrastructure fund increases are welcome, but the real catch here is delivery. It’s a credit plus subsidy game. The question is whether there will be enough takers on the credit side, and that depends on whether sufficient revenue models exist to ensure that borrowers can earn money from their godowns and warehouses,” he said. He welcomed the cess for agri infrastructure, noting that reserving money for this purpose in a separate account could inspire investors.
Environment
The Rs 230-crore reduction in the allocation to the environment ministry has drawn criticism from environmentalists who say it may slow down or even completely halt green initiatives. They also point out that the Centre has not clarified how a separate amount of Rs 2,217 crore, set aside for tackling air pollution in 42 cities with minimum population of one million, will be utilized.
The government has allocated Rs 2,217 crore to tackle air pollution in 42 urban cities and introduced a voluntary vehicle scrapping policy. But it isn't clear how these funds would be utilized to resolve the pollution crisis.
In the previous budget, the government had announced Rs 4,400 crore for clean air, however, there is no information on public platforms on how this fund was utilized.
Research, Development, and Innovation
The National Research Foundation has been allocated a budget of INR 50,000 crores to be spent over a period of 5 years to ensure that the overall research ecosystem of the country is strengthened.
The Department of Space has been allocated Rs 13,949 crore, of which Rs 8,228 crore have been earmarked for capital expenditure. Rs 700 crore has been allocated for the New Space India Limited (NSIL), a newly formed PSU under the Department of Space. As part of the Gaganyaan mission activities, four Indian astronauts are being trained on Generic Space Flight aspects, in Russia.
The Budget also announced a National Language Translation Mission (NTLM) to enable the wealth of governance and policy related knowledge on the Internet being made available in major languages spoken throughout the country.
A Deep Ocean Mission with a budget outlay of more than INR 4,000 crores, over five years has been announced. This Mission is set to cover deep ocean survey exploration for the conservation of deep sea biodiversity.
Many of the cities in India have various research institutions, universities, and colleges supported by the Government of India. In 9 such cities, formal umbrella structures have been proposed to ensure that these institutions can have better synergy yet retain their internal autonomy. A Glue Grant will be set aside for this purpose.
These initiatives were welcomed by tech companies and industry experts, claiming that the push towards innovation will drive the economy towards progress.
Taxes
The Budget left direct taxes unchanged, but changed tax incentives to ease compliance for taxpayers. According to the Finance Minister, ITR filers increased to 6.48 crore in 2020 from 3.31 crore in 2014. Here is what she proposed for them.
- Pensioners over the age of 75 years need not file ITR.
- A dispute resolution committee for small taxpayers to be planned.
- Anyone with taxable income of up to Rs 50 lakh, disputed income of up to Rs 10 lakh eligible to approach the dispute resolution committee.
- Advance tax liability on dividend income shall arise only after payment of dividend.
- Pre-filled tax forms with respect to details like salary income, tax payment and TDS.
- Re-opening of past assessments has also been reduced from 6 years to 3 years in a bid to provide relief to the taxpayer.
- A faceless dispute resolution committee to be set up for individual taxpayers and constituting the dispute resolution committee for small taxpayers.
- The interest earned by the Provident Fund contributions above Rs 2.5 lakh a year will now be taxed at the normal rates.
Conclusion
Our government is fully prepared to support and facilitate the economy’s reset,” the Finance Minister said. Stocks jumped on the news, with the benchmark Sensex shooting up 5%, as the government’s spending plans were larger than investors had expected.
Some economists have been suggesting India could afford to spend more in these tough times. It has been spending less than most Asian economies on stimulus packages—less than 5% of GDP compared with more than 10% in richer countries including Thailand and Japan, according to calculations by HSBC Global Research—to get its economy back on track.
With a nationwide vaccination drive under way, India is shifting focus from only saving lives and keeping the virus from spreading to returning to the high growth we need for the welfare of the lives of more than 1.3 billion citizens.
“Our priority then was to save each and every life,” Prime Minister Narendra Modi said last week, referring to the lockdown that throttled growth. “Now each and every person of India is committed to the progress of the country.”