In December 2020, talking at a CII meet, finance minister Nirmala Sitharaman reportedly stated: “100 years of India wouldn’t have seen a budget being made post-pandemic like this”.
Was it a mere statement of fact, that never before had parts of the budget-making process been done in a virtual manner after a pandemic, or a statement of hope – that the final result would indeed be a budget never before seen in a century?
It is almost a year since COVID-19 hit India and laid the economy low. The country has witnessed its sharpest fall in economic activity since the country began announcing GDP data. Even compared to most major economies in the world, the fall in India’s GDP was the steepest.
As a result, there is the crisis of unemployment, steep rise in demand for work under MGNREGS, decline in incomes due to loss of employment and cut in salaries of the employed, failure of businesses, rising financial distress and growing NPAs, rising disparities, steep fall in government revenues and correspondingly a sharp rise in the fiscal deficit in the budget. So, large sections of the population are hit hard.
All this is in spite of the government’s ‘Atmanirbhar package’ of Rs 20 lakh crore. If a large number of basic problems persist in spite of the seemingly huge package, then can the budget help resolve them? After all, the Union budget for 2020-21 had budgeted an expenditure of around Rs 30 lakh crore. The Atmanirbhar package did not add much to the budget expenditures since most of it was loans and credit and many schemes were continuing schemes from earlier budgets and did not require additional allocations. The increases were also balanced by the cuts in expenditures by ministries since the fiscal deficit was rising. So, all in all there was little step up of budgetary expenditures in 2020-21.
For the year 2021-22 also expenditures will roughly be similar in size. Given that the economy has contracted in 2020-21, and will still be less than what it was in 2019-20, the revenues will remain short. So, unless the government is willing to allow the fiscal deficit to rise sharply, it cannot increase expenditures to support the citizens who are suffering due to the economic downturn. Thus, a substantial stimulus to the economy and succour to those suffering due to the pandemic is unlikely. It will then be more of the same in the budget for 2021-22.
Need to get the numbers right
The pandemic and lockdown have thrown the budgetary calculus completely out of line with what was budgeted for the current year, 2020-21.
The budgetary calculus depends on the projected growth of the economy during the coming year. The budget for 2020-21 was based on a projected nominal growth of 10%. So, the GDP was expected to increase from Rs 204 lakh crore to Rs 225 lakh crore. All projections for revenue and expenditures were accordingly calculated. Instead, as per the official pronouncement in the first advanced estimates of GDP, which are used in budgetary calculation, there is a nominal fall of around 4%. Thus, the GDP would have contracted to Rs 196 lakh crore – a short fall of Rs 29 lakh crore.
The implication is that during the year 2020-21, there is a shortfall in revenues – corporation tax, personal income tax, customs duties and GST will be short by substantial amounts. Only excise duty collected on petroleum goods would be higher since their retail prices have been substantially raised in spite of the sharp decline in crude oil prices globally. It is due to this fall in both tax and non-tax revenues that in spite of expenditure cuts, the fiscal deficit in November had already climbed to 135% of the annual target – that is, the deficit was 35% more than what it should have been by March 31, 2021. So, of the lower GDP, the fiscal deficit was running at 8.2%. Add to this the deficit of the States and the public sector and it would be not less than 15% of GDP.
Official GDP numbers are problematic. The quarterly GDP number is based on limited data – except for agriculture, it does not independently account for the unorganised sector of the economy. The press note for Q1 and Q2 data admits that they are based on limited data and the numbers are likely to be revised later. The high frequency data which the government and the RBI use are from the organised sectors. For instance, GST data represents mostly the organised sector since 5% of the units pay 95% of the tax. Similarly, auto sales and air travel reflect only the well-off sections from the organised sector and some self-employed professionals.
But, the unorganised sectors were the hardest hit and continue to suffer due shortage of working capital and destruction of demand in the economy. If that is factored in the data for GDP, the GDP in nominal terms would decline by 25% for the year as a whole. Thus, the GDP for the year would turn out to be Rs 153 lakh crore. The fiscal deficit would then be running at 10.5% for the Centre and for the combined deficit in public sector, it would be not less than 18%.
This number is likely to rise if the government steps up expenditures since it has stated that it has kept the powder dry and not exhaust the fiscal space so as to boost the economy when it opens up. Now that the official claim is that the economy is working at the pre-pandemic level (Q3 and Q4 rates of growth are supposed to be marginally positive) it should increase expenditures, but then the deficit can only increase further. The expenditures are also expected to rise if the promises under the Atmanirbhar schemes are fulfilled.
Since any budget is drafted on the basis of the revised estimates for the current year, the correct estimates for 2020-21 are required. If the revised estimates for 2020-21 for expenditures and revenues are not correct, then the projections for 2021-22 will also be incorrect.
The budget to be presented on February 1, 2021 will indeed be a once a century budget, since never before has the GDP and revenue collection fallen so steeply. Never before have the revised estimates been so out of line with what was projected in the budget. The fiscal deficit for the entire government has never been so high. How will the budget for 2021-22 deal with all this will be a once in a century occurrence?
Given that major components of the economy (tourism, transportation, etc.) are at way below the 2019-20 levels and unemployment remains high, the GDP in 2020-21 will be less than its pre-pandemic level, two years back. In spite of the roll out of the vaccine, there is uncertainty given that many countries are experiencing variants of the virus, going into lockdown again. In India, given the scale, vaccination will not create herd immunity for at least another 10 months. So, caution will have to be exercised.
With these adversities and uncertainties in place in 2021-22, the “once in a century budget” needs to take the economy out of the morass it finds itself in. Resource shortage will continue while expenditure demands will be at elevated levels to help boost demand in the economy. So, fiscal deficit can only remain high, if the economy is to be boosted.
Supply side policies take time to work out as has been seen in 2020-21. Changes in labour regulation, privatisation of PSUs and the farm laws are being strongly resisted. They are only diverting attention from the urgent task of taking the economy out of the morass it finds itself in. One in five businesses are not able to repay their loans and the financial sector is getting stressed. Loans for the MSME sector are mostly going to the medium scale units and hardly to the micro sector. So, the unorganised sector continues to suffer. And so on.
The FM’s task is cut out
The budget will have to help boost demand so that industry revives much more broadly than it has. We need to remember that the economy was already in decline before the pandemic and those reasons have only got aggravated as inequalities have increased and the unorganised sector has continued to decline.
Demand will rise if a lot of employment is generated and the unemployed get incomes. This will require additional resources, as otherwise, the deficit can only balloon—which the FM has consistently resisted due to the fear of adverse reaction from credit rating agencies. Pro-business analysts and lobbies are suggesting disinvestment and sale of public assets (like, land) to raise funds. But when incomes are depressed, that can only lead to lower asset prices and worsen the investment climate further.
This is the once in a century opportunity to steer the economy out of an unprecedented crisis. Otherwise, it will just be a fact that the budget is drafted in the most adverse circumstances, without providing a way out of the crisis.
Arun Kumar is the author of Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead, Penguin Random House.