Authored by Manas Chakravarty

Austrian sociologist Rudolf Goldscheid held that “the Budget is the skeleton of the state stripped of all misleading ideologies”. What does Nirmala Sitharaman’s latest Budget tell us about the Indian state, stripped of all its misleading ideologies?

Consider her Budget speech. It was a speech dear to the hearts of the private sector and equity markets - full of references to privatisation, sale of equity in government companies, increased spending on infrastructure, a stressed asset resolution company to take bad debts off bank books, foreign direct investment, production-linked incentives for creating global manufacturing champions, selling off government land, ports, airports, roads, pipelines, closure of sick public sector units. It's a bonfire of all the vanities. There are no longer any ifs and buts, no shilly-shallying, the government has come out with all guns blazing. Its business-friendly ideology was never a secret, but it has reiterated it very forcefully in this budget. We now have our own Ronald Reagan and Margaret Thatcher. Small wonder the equity market has been euphoric.

To be sure, there isn’t really much of a new push to growth for FY22. Total expenditure is budgeted a mere 0.95 percent more than in the revised estimates for FY21. Capital expenditure, including the spending by the public sector enterprises (known as IEBR or Internal and Extra Budgetary Resources) is budgeted to go up just 4.8 percent over the revised estimates for the current fiscal year. And the fiscal deficit budgeted is much lower than in the current fiscal year. But then, both expenditure and the deficit ballooned in the current fiscal year---all that the budget is doing is signalling that it will maintain its support to the economy, despite the pandemic waning in India, despite the vaccine and despite the pick-up in private sector activity, as seen from the excellent December quarter corporate results and the PMI numbers. Best of all, the finance minister has said there will be no abrupt pruning of the deficit in FY23 too, saying instead that it will slowly go down to a still comparatively high 4.5 percent in 2025-26.

Far more important than the decision to support short-term growth, however, are the signals the government has sent for the long-term. The focus on privatisation and infrastructure will improve productivity, providing a push towards increasing the Indian economy’s potential growth.

What’s more, gross fixed capital formation as a percentage of GDP in 2019-20 was already the highest since 2013-14 and investment demand is likely to pick up now, especially with the government’s fiscal push. As everyone knows, higher investment demand is the key to sustainable growth.

There has been much talk about the Twin Balance Sheet problem pulling down India’s growth, with debt and bad loans weighing on India’s corporate sector and banks respectively. But the manufacturing sector’s aggregate debt-equity ratio in 2019-20 was the lowest in decades and interest cover is now the highest since 2010-11. The deleveraging of corporate balance sheets has mostly been done, except in a few sectors. Buoyant markets have helped.

The setting up of the bad bank will improve the balance sheets of banks, many of which are already in better shape thanks to raising capital and making provisions for bad debts. The NBFC problem has also improved. With the easing of balance sheet constraints, growth can now resume. We could be pleasantly surprised by growth this year and the budget’s nominal growth target of 14.4 percent growth is likely to be easily exceeded.

That could bring down the fiscal deficit. In fact, the budget has been more transparent about the fiscal deficit by bringing its off-budget spending into the budget estimates. By an apples-to-apples comparison, by bringing in off-budget items in FY21 too, the fiscal deficit for the current year goes up from 9.5 percent to 10.1 percent. And the fiscal deficit for FY20 goes up from 4.6 percent to 5.3 percent. The 6.8 percent fiscal deficit budgeted for FY22 should be seen in that perspective.

A word about the government’s spending priorities. It’s best to compare budget estimates of FY22 with budget estimates for the current year, because the pandemic skewed priorities.

Here are the results: Agriculture & allied activities—down 4 percent; Health—up 10.4 percent; education—down 6 percent; rural development—up 34 percent, mainly on account of allocations to the rural drinking water mission; social welfare—down 10 percent; urban development—up 9 percent; defence—up 7.4 percent.

What are the risks in the Budget’s strategy? Implementation is the obvious one — the government has dragged its feet on disinvestment and privatization before. Higher interest rates are a distinct possibility and the RBI will have to work its magic to keep them down. But, as mentioned above, growth is likely to be stronger than envisaged and that could keep the fiscal deficit down.

The problem may lie in the long-term glide path of the fiscal deficit, to 4.5 percent by 2025-26. As the IMF Fiscal Monitor, published this month, said, ‘India’s government debt is expected to remain elevated, at 83 percent of GDP, highlighting the need for a credible medium-term fiscal framework to enhance confidence, anchored on revised fiscal objectives and revenue mobilization.” But such thoughts are for nitpickers and naysayers. For the present, this excellent budget deserves our full-throated applause.