While the high fiscal deficit would not be credit positive for international credit agencies, in the current environment, it would have been impossible to push the growth without fiscal destabilization in the short to medium term
This Union Budget has been very pragmatic and positive. Even as the Budget misses the expectation of being unconventional, multiple unique initiatives have been announced such as fintech hub, gold exchanges, digital census etc. The big thrust on infrastructure and healthcare sets a positive story. This will boost the economy through the multiplier effect and helping other ancillary sectors and create jobs rather than what direct consumption boosting measures would have.
The government had to balance between job creation vs direct allowances. We are aware that COVID-19 has led to increasing in precautionary savings and contraction in consumer spending. The measures taken such as setting up a Development Finance Institution, a fairly rational blueprint for asset monetization, enabling debt financing of InVITs and REITs by foreign portfolio investors, and a friendly tax regime for foreign investors was much needed to assuage the concerns of raising funds for the government’s ambitious targets under NIP.
A dashboard for monitoring progress is a good start. Most noble is the capital allocation of Rs 2 trillion to States and UT as they would be implementing most of the projects under the NIP. However, it to be seen how the government along with the RBI tackle the issue of NPAs in the banking sector which is expected to emerge as one of the biggest risks not only in India but also globally. Unlike the developed countries, India will not be able to afford to take the path of debt monetization to support its financial sector.
The initiative to set up an Asset Reconstruction Company Limited (ARC) and Asset Management Company (AMC) in this regard looks promising, nonetheless, India needs to find investors to buy impaired assets in India. The mechanism has to set rightly. The incentivization and the management of the ARC and AMC should be such that it does not follow the steps of the public sector units. Increasing the FDI in insurance and IPO for LIC was another strategic step to pull in the foreign funds as insurance is expected to be a booming sector post-COVID-19. However, the lack of focus on exporters and tweaking the tariff norms set a distortionary picture to the global investors which should have been managed well.
The clarity given on the fiscal deficit is very laudable. Setting realistic deficit targets, bringing loans to Food Corporation of India (FCI) to the budget balance sheet, and laying down a revised road map for fiscal consolidation is a commendable move. The biggest concern lies in the fact that fiscal support in FY22 also largely depends on revenue generation from disinvestment.
More clarity on the implementation of privatization was expected. While the high fiscal deficit would not be credit positive for international credit agencies, in the current environment, it would have been impossible to push the growth without fiscal destabilization in the short to medium term. This nonetheless makes it an expansionary budget and poses a risk to inflation.
The writer is Global Chief Economist, Dun and Bradstreet
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