The finance minister has delivered a truly many-splendored budget that ticks all possible boxes that I can think of. Of the three As I assign to it, the first A is for boldness. The budget goes where no previous one has gone before: it has announced it will privatize two public sector banks. Hitherto governments, both UPA and NDA, have looked at PSU banks as a kitty to fund their favourite projects or PSU bankers as a bunch of central government officers who will do their bidding in the states.

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This forthright announcement that two banks will be privatized has pushed up shares of all PSU Banks. The market, expectedly, is guessing that the end game for more and more PSU banks could be privatization. Thus merely by announcing intent, the government has made it easier for all PSU Banks to raise capital at better prices, thus lessening the need for capitalization. Excellent thinking!

The second instance of bold thinking is the announcement of an asset reconstruction company that will assume all the stressed assets of banks and sell them to Alternative Investment Funds. While details are still sparse or nil, the intent is good enough to make investors keen to own PSU bank shares, which again solves the problem of capitalising these banks. The government also deserves an A for promising to improve the working of the NCLT, which probably implies passing the amendment to allow pre-packs (or pre-decided resolution packages for smaller companies) that require only a quick nod from the NCLT. Net-net, the efforts to clean up banks is sincere, imaginative and many-sided.

My second A for the budget is for transparency. The government has rightly brought extra-budgetary borrowing into the budget. This is most obvious in the food subsidy, which hitherto was being financed by the FCI borrowing from the NSSF. The onboarding of these expenses onto the budget won’t burden the government because now more is available to it from the NSSF for other programmes. A 9.5 percent deficit for FY21 and 6.8 percent deficit for FY22 is huge, but not if it is mostly acknowledging debt that the government was anyway holding under a different heading called EBR.

The third A for restraint (for want of another word) is for the government not making outlandish assumptions. Quite contrary to previous budgets, the government is assuming that tax revenues will grow at the same pace as the nominal GDP, around 14.4 percent. And the nominal GDP growth assumption itself is less than that of most economists, which is again a show of remarkable restraint. The government could easily have assumed a 16 percent nominal GDP and a 20 percent tax revenue growth, thus cutting down the fiscal deficit to 5.5 percent. The restraint is admirable.

So what are the risks then? The Rs 9.2 lakh crore government borrowing through bonds is certainly a risk, but given that credit growth is still only slowly crawling up and the RBI still has the elbow room to help with OMOs (open market operations), this is perhaps the right time to announce a large borrowing programme.

The bond market has shown its displeasure by pushing up yields, but it may not push much harder given that RBI could jump in and buy and leave them with losses, especially now that inflation is set to recede for the next couple of months. Even for the rest of the year, the base case is the RBI should be able to manage.

There are other risks though:

1.

Even after the government’s stated glide path of reducing the fiscal deficit over 5 years, the deficit comes down to only 4.5 percent by 2026. This leaves open the danger of a high debt-to-GDP ratio for a few years. And if inflation and interest rates were to flare up and growth does not oblige, there is the making of a debt trap here. Growth simply has to kick in. Else we are in trouble.

2. The second risk is if an external crisis manifests before growth picks up sustainably. In such a case, the economy can be close to what it was in 2013 when the taper tantrum roiled us. To be fair, this is by no means the base case now.

3. A third risk is that of a rating downgrade. The government may have assessed this as “unlikely”. But should a downgrade come, the debt markets may still be safe, since foreign funds haven’t been buying Indian debt at all. The worry will be if any equity funds follow ratings in their investments.

While the budget announcements get a AAA, on implementation, one has to reserve one’s judgment. Privatizing banks, completing the IPO of LIC, setting up the ARC, sprucing up the NCLT to resolve stressed loans of MSMEs are all laudable but very tough proposals. They require well-drafted legislation, intelligent financial design and persuading many constituencies like unions to play ball.

Delay, defective design or trust deficit can kill these plans. The current finance ministry has rendered a good account of itself in the past one year on implementation, be it the credit guarantee for MSMEs or the designing of the PLI (production linked incentive) schemes or the food transfer schemes. Let us hope they will continue the good run in these far more challenging proposals.

(Edited by : Nazim)