Ray of Hope for Financial Sector but Proposals Depend on Imponderables

Budget 2021 has made some big promises and taken bold steps to revive the economy. But what is the feasibility of these moves? ANJAN ROY analyses the probable impact of the budget on the rising fiscal deficit and strengthening India's financial institutions.

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WITH an admission of a large fiscal deficit, the Indian economy is showing a contraction for the third time in our recent history. An uncertain future is looming as the pandemic is still active. A vaccination programme has been just launched. In this scenario, it looks as if this is the best bargain of a budget that the country could have looked at.

It is good because it is somewhat boring. This is good because it is not attempting large ambitions. It is good because it has retained a stable tax structure. It has placed faith in India growing.

But one interesting aspect of this budget is that it attempts monetisation and "financialisation" of vast segments of the economy that can have critical implications for the financial economy of the country.

Watch: Union Budget 2021-22: Another Step Towards Privatisation

First, the government finances would have to pervade influence on the entire economy. This to a large extent sets the pace of the economy. In the context of the pandemic when the overall activity was hit and GDP contracted, and, the government's take by way of taxes also hit the bottom, the finance minister has chosen to spend. The finance minister chose to retain this level of fiscal deficit. Not trying to squeeze the expenditure low would have been counter-productive.

RISING FISCAL DEFICIT

India's fiscal deficit is set to jump to 9.5 percent of GDP in 2020-21 as a revised estimate. This is sharply higher than the 3.5 percent of GDP that was projected in the budget estimates.

The government plans to borrow another Rs 80,000 crore to fund the deficit this year. Gross market borrowings for next year has been pegged at Rs 12 lakh crore. A new roadmap for fiscal consolidation has been announced in the budget. The budget is saying a lot of the additional funds would be spent on capital expenditure.

The finance minister is talking about monetising the government's assets like handing over national highways, airports, ports, and what not into the hands of private players on a Public Private Partnership basis and raising fresh funds. That is, what is happening is converting idly held assets in the hands of the government.

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It is good that the finance minister is not overly bothered about how the international rating agencies would react to the rising fiscal deficit. Questions have been raised why despite such large government expenses and augmented expenditure as pump-priming for the economy,  why India's GDP contracted comparatively to other peer countries.

One explanation could be that a large part of the extra expenditure could have been for the support of the lowest and economically weaker sections. This would have gone for income support, for distribution of food, or other necessities. The growth multiplier effect of purely social security payments could have a little expansionary effect on the economy.

Secondly, the budget has several initiatives over straightening the Indian financial sector. One of the major sticking points for the financial sector has been bad debts. The budget is proposing to set up a new entity for taking over the bad debts and non-performing assets and then manage or sell off these junk assets.

BAD DEBTS

Taking away the bad debts of the public sector banks would carry away a lot of stress on them. Once these are offloaded to the new proposed bank for bad assets, their capital structure would to that extent get strengthened. On top of that, the government has proposed to make fresh investments in the capital bases of these banks. So then, these two steps would go a length to put the public sector banks on a far stronger base than what it currently is.

Also Read: Getting Budget 2021-22 Right is Easy: Government Should Just Listen to Citizens

Additionally, the budget has also proposed that banks tap the market to raise free capital. For this purpose, the budget is also proposing to bring amendments in the banking laws to allow possibly more private sector holding in public sector banks.

Thirdly, the proposal for setting up a new development finance institution would be a good step for meeting the long term debt for corporate India. There is some history behind this move though. India had three development finance institutions, namely, the Industrial Development Bank of India, Industrial Credit and Investment Corporation of India and the Industrial Finance Corporation of India.

These three institutional finance organisations had aided the growth of the industrial sector in the country. These provided cheap long debt funds to industrial corporates to make investments in new plants and machinery. In course of an earlier spree of financial sector reorganisation and reforms, two of these institutions were converted into universal banks, namely, IDBI and ICICI.

Once again, setting up a dedicated development finance institution with a corpus of Rs 20,000 crore, which is expected to mobilise fresh investment to the tune of Rs 5 lakh crore, could be a significant contribution to greenfield investment in the country.

Also Read: Economic Survey 2020-21 Calls For More Active Counter-Cyclical Fiscal Policy

Lastly, the budget has proposed to liberate the life insurance sector as well. The finance minister has proposed raising the foreign investment threshold of investment in life insurance from the present 49 percent to 74 percent. This is an area that has huge global players that have a good deal of funds mobilisation potential from such opening up. They have advanced financial technologies based solutions for long term insurance.

Will the Indian economy fulfil the Finance Minister's plans?

There has to be an element of hope.  The Finance Minister is depending on many imponderables, but one has to keep hope alive for a turnaround. (IPA Service)

(Anjan Roy is a senior business journalist. The views are personal.)