No Fiscal Penny-Pinching; Policy Corroboration, Focus On Healthcare And Infrastructure – Budget 2021 Hits The Right Notes

Indian Union Budgets have largely become an event to check for negative surprises in the last few years – the broader policy making happens round the year and is no longer dependent on the Budget day.

In a tough year when the world battled a once in a lifetime pandemic and continued uncertainty ahead on geopolitical as well as economic front, the budget expectations were largely negative.

New taxes, additional cess, securities markets taxes – a litany of disappointments was pre-lined. Finance Minister Nirmala Sitharaman stayed clear of all of these.

But more importantly, the Finance Minister set the direction for the next few years in four broad ways in the Budget 2021.

Firstly, India has finally gotten over the tyranny of rating agencies.

With the projected fiscal deficit of 6.8 per cent even as the economy seems to be improving, the government has kept enough space for fiscal interventions in the post-Covid-19 recovery year.

Even more importantly, the glide path on fiscal deficit is now 4.5 per cent in 2025-26, which should address future needs for fiscal expansion as well as managing deficit expectations.

With this signalling, the government has clearly indicated that it will no longer worry about the commentary of the rating agencies.

As if to put a cherry on the top, the states will also be allowed to borrow up to 4 per cent of their gross state product for next year, albeit if they promise to spend more on capital expenditure.

In fact, the states will be allowed an additional 0.5 per cent borrowing subject to certain conditions. Their glide path to 3 per cent deficit will be until 2023-24.

Secondly, a big push for healthcare infrastructure is a welcome move.

The Ayushmaan Bharat programme was already in place for a while covering the costs of specific treatment for about 50 crore Indians. But the physical infrastructure, including research institutions for future challenges, had not kept pace.

The 137 per cent increase in the Union Budget – a budgetary estimate of Rs. 2.27 lakh crore on healthcare is an investment in India’s human capital.

The PM Atmanirbhar Swasth Bharat Yojana will focus on this physical infrastructure. With an outlay of Rs. 64,180 crore over six years, about 29,000 health and wellness centres will come up under this programme around the country.

Every district will get an integrated public health lab. The government will help establish 12 central institutions and critical care hospital block in 602 districts.

The National Centre for Disease Control, its regional branches and metropolitan health surveillance units will be strengthened. India will also set up nine bio safety level III laboratories and four regional National Institutes for Virology, to complement the one in Pune.

These investments will have second order effects as well, not talked about in the Budget speech.

This physical infrastructure will lead to new investments in medical device manufacturing and pharmaceutical industry in general. That also dovetails with the Production Linked Incentive programme government is running for 13 industries to increase local manufacturing footprint – pharmaceutical industry is part of that.

Thirdly, the stress on building physical and financial capital continues. The government has the National Infrastructure Pipeline of Rs. 120 lakh crore to fund over the next five years.

Creation of a Development Finance Institution is a big step in funding this massive outlay.

The budgetary allocation itself has increased 34.5 per cent to Rs. 5.54 lakh crores, which is a good sign.

While roads, railways, ports, power and urban infrastructure will all gain, the most exciting announcement was perhaps from the railways sector.

Three new Dedicated Freight Corridors – East Coast from Kharagpur to Vijayawada, East-West from Bhusaval to Kharagpur to Dankuni and North-South from Itarasi to Vijayawada have been announced as the next focus.

These will be big projects creating a national railway logistics grid.

The Finance Minister laid stress on asset monetisation as a key intervention. To this extent, the National Highways Authority of India and Power Grid Corporation are already floating one InvIT each. But the budget talking about this route is a good sign itself.

Specific investments like seven large textile parks with plug and play operations, 20,000 local city buses, five mega fishing harbours and seven ports were the other highlights on the infrastructure side.

Fourthly, the most important statement of policy continuity was on divestment.

What the government has outlined is quite ambitious and will face stiff resistance from narrow interest groups and of course from the central government employees themselves.

The new policy has identified four strategic areas – atomic energy, space and defence, transport and telecommunications, power, petroleum, coal and minerals and banking, insurance and financial services. The policy says that outside of these areas, all public sector enterprises will be either privatised or closed.

Within those four areas too, the government will only retain a few companies, others being merged, subsidiarised or privatised.

These are hugely transformational ambitions – of course, there is a long road to achieve these goals.

The government signalling that the resources for its expanded outlay will primarily come from political decisions and not taxation is a big statement directionally.

This is also a mindset change, which is always difficult to implement in the government machinery.

The budget talked about only simplification to direct tax process changes, which came as a shock – a positive one – to those tuned in to the speech. And that was the point where the market took off as well.

The equity market closed five per cent up in response to the budget. However the 10-year government bond yield shot up to 6.06 per cent, so there’s work to be done by the government as well as by Reserve Bank of India.

All in all, the first budget of the new decade sets the direction for an Atmanirbhar Bharat – focus on human capital and physical infrastructure. The follow-on reforms, mid-term policy announcements and walking the talk on the budget ambition needs to continue.