The spirit of 1991 is again, and the way!

Pant and Pujara! Chief economic advisor K Subramanian was spot on when, after presenting the Economic Survey for the year, he said we would see both the heroes of the Gabba in action when the Budget was presented. Finance minister Nirmala Sitharaman played defensive cricket by keeping her total expenditure for FY22 at almost the FY21 levels – it rose a whopping 28% in FY21 – since raising it any more would have spooked bond markets even more given that, at Rs 9.7 lakh crore, FY22 borrowings are 80% more than those budgeted for FY21.

And yet, by promising to privatize two banks – other than IDBI Bank – as well as one general insurance company, Pant-like, she signalled her ability to take big shots, a welcome return to privatisation after close to two decades; it is, course, baffling that despite this – and a brand-new policy on keeping just a limited number of PSUs in a few sectors – the disinvestment target is below the original target for FY21; this is disappointing since it suggests the FM is not too confident of her government’s ability to deliver on the new policy in a hurry.

Increasing FDI in insurance to 74% and not imposing a Covid surcharge, or a wealth tax on HNIs as was suggested by some, shows that Pant-like, the FM wasn’t going to play defensive cricket; taxing the rich is a favourite tool of all finance ministers when revenues are to be raised and goes down well with the phony socialism most governments practice. Dramatically restricting the amount of interest-free income on contributions to provident funds, though, will raise taxes for those in higher income brackets; but it does bring some parity in the tax treatment of different savings instruments.

Before the budget, this column had talked of five ways to rate the budget. This included keeping expenditure levels high, raising privatisation levels, not levying any new tax/cess, a big infrastructure push and a return to 1991-style reforms. In a broad sense, the budget checks all the boxes, even if to varying degrees. Expenditure levels in FY22 will remain mostly flat, but thanks to a dramatic increase in levels in FY21, the expenditure-to-GDP levels in FY22 are likely to be around 15.6%, a number not seen in around a decade if you exclude this year. Also, within the overall expenditure number, that for capex has risen by more than a third.

Keeping the FY22 disinvestment target at a mere Rs 175,000 crore is unfortunate but, given the government will raise just Rs 32,000 crore in FY21, it is a big jump. Of course, given India Inc raised Rs 140,000 crore in just April to December 2020, it is limited in its ambition; ideally, as this column had suggested, the government should have moved to a Systematic Withdrawal Plan (SWP) type of disinvestment strategy where, irrespective of the price of the PSU, a certain number of shares would be sold each month; keep in mind that, with the value of PSU stocks falling 9% since when prime minister Narendra Modi was first sworn in – while private sector firm market capitalization rose 2.2 times – each day the government holds on to a stock means it is losing value.

After having promised several sweeping reforms, the question is whether the budget will be able to deliver. PSU privatisation such as that of Air India, keep in mind, has failed in the past due to the government not being pro-active in terms of taking on all its debt. Similarly, a fourth of the Rs 100-lakh-crore National Infrastructure Pipeline depends on whether investment is made in the power sector. The budget recognizes the need for urgent SEB reforms and it says that a “revamped reforms-based result-linked power distribution sector scheme will be launched with an outlay of Rs 3,05,984 crores over 5 years”. Keep in mind this is something that UDAY also promised, but failed to deliver upon. Why not allow RBI to deduct state government accounts if their state electricity boards (SEBs) fail to pay their dues, as they will if they fail to reform? Providing a hard budget constraint for SEBs would have made the government’s promise more believable. Monetisation of brownfield assets like roads or the railways’ dedicated freight corridor, as has been planned, is a good idea and will reduce the risk for private sector firms that invest in infrastructure, but a target for this would have been a good idea.

A ‘bad bank’ of sorts has been promised with talk of an asset reconstruction company (ARC) to take over the bad debt of banks, but more details are needed before reaching a conclusion on whether it is a good idea or not. In itself, a bad bank is a bad idea since it makes banks more profligate once the NPA-overhang is gone, but at a time when bank credit is crawling due to high NPAs, a solution was required; and if bank NPAs are taken over, it makes privatizing them easier. There are, though, tricky issues that need to be tackled – and this could delay the ARC; at what price will the assets be taken over, who will take the haircut, etc.

While higher expenditure this year – keeping the deficit at 6.8% makes it clear the stimulus of higher government expenditure will remain high for a few years more – is a good idea, both exports and investment have fallen by nearly 12% of GDP in the last seven years. India cannot regain its GDP momentum in even the medium-term unless this is fixed. While reversing all industry-unfriendly policies of the government is not something one budget can do, it is unfortunate that while talking of the need for India’s manufacturing firms “to become an integral part of global supply chains, possess core competence and cutting-edge technology”, the budget raises import tariffs; import-substitution is a failed 70+ year-old strategy, but the government thinks it can turn it around.

After the furore over even the minor start to farm reforms, and the likelihood that even these will be reversed – kept in abeyance, to use the official version – no one expected any more farm reforms; so, while the FM has brought in more transparency in FCI’s subsidies, there has been no movement in fixing either fertilizer subsidies by moving to direct benefit transfers or in reducing the mammoth food subsidies given to two thirds of the population. No farm reform means India continues to spend four times as much on subsidies than on capital expenditure.

After being bowled out for 36 in the past, though, the FM has displayed the right amounts of both Pant and Pujara this time around; whether Team Modi continues its winning performance will depend on how it fares in future tests.