Budget 2021: Despite some hits, the Budget has crucial misses

Synopsis: The recently released budget 2021 has got a few things right, but there are some issues as well.

Introduction

The government’s response to distress in the economy was below expectations. Public spending was just over 1% of GDP. It was in a situation when GDP growth was in the negative zone and the unemployment rate was high.

In this budget 2021, the government has proposed increasing public investment by 34.5% in the upcoming fiscal year. It is a positive step for the economy.

However, the finances for investment depend upon several factors like tax revenue, Disinvestment proceeds, Sale of rail and road assets, etc.

How this Public Investment would be realized?

  1. Firstly, the government would increase public investment by borrowing. It will be an additional ₹80,000 crore for the purpose in the next two months.
  2. Secondly, states will be allowed a higher fiscal deficit, in the case of capital expenditure. If the capital expenditure plan outlined in the Budget 2021 speech is implemented with assured financial backing, it could revive the investment cycle.
  3. Third, the Development Finance Institution (DFI) proposed in the budget. There was a lack of long term credit for infrastructure in the last decade. The most successful industrializing economies have been utilizing DFIs for providing long-term credit.

What are the issues in the 2021 budget?

  • First, DFI mentioned in the budget will be financed by foreign portfolio investments (FPI), which is a cause for concern. FPI represents short term inflows with exchange rate risks. This investment will certainly lead to currency and maturity miss-match, increasing the cost of capital.
  • Second, the NFHS data for 2019-20 indicated that constructing toilets in households is of no use unless adequate access to water and sewage facilities are provided. Thus, the effectiveness of such investments depends upon coordination with other facilities.
  • Third, the Budget 2021 has not mentioned the unemployment and migration crisis due to pandemics which led to the rise in economic inequality. The budget did not consider a special tax on the super-rich.
  • Fourth, there is no targeted employment program to alleviate the immediate crisis is a matter of concern.

Way forward

  • There is a need to consider alternative long-term sources, preferably from domestic sources, or international development agencies to make DFI a success.

Proposal to establish Bad bank and Development Finance Institution [DFI]

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