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Sunday, October 2, 2022

The Budget with a human face: Decoding Nirmala Sitharaman’s 2021-22 Budget

With Bharat’s economy gradually crawling ahead on the recovery path and nursing the wounds, the pandemic has inflicted on it, Budget 2021 was pegged as a make or break budget for the country. Apart from the pandemic Bharat’s economy was also reeling under severe demand crunch (even in the pre-COVID quarters) and was looking for some serious structural changes and announcements in this budget.

Though economists are trained to be cynical I must admit that this budget almost ticks all the boxes and comes out with flying colours. Calling it borderline revolutionary would not be an exaggeration simply because, in my opinion it marks a clear departure from the usual reductionist “growth-centric” approach to a broader and integrated “development-centric” approach.

Before I get into the nitty-gritties and the rationale of the proposed union budget, here’s a little reminder to the readers. Remember designing the budget of a country is like planning the finances of a household. When we usually plan our finances what are the two major things we look for?

Firstly what to spend on and how much and second and the equally important one is how to finance the expenditure requirements. The two go hand in hand. And moreover it’s a multi-period exercise.  If you take a loan now to buy a house, you would need to pay back (the accrued interest and principal) in the subsequent years.

Hence as I embark on my discussion I will broadly divide the article into two parts. The first section would focus on the rationale of the budgetary allocations and the next one will throw light on how this proposed expansionary fiscal policy is to be financed.

Section I:  The Major Budgetary Allocations

The Budget proposals rest on 6 pillars:

  1. Health and Wellbeing; 
  2. Physical and Financial Capital, and Infrastructure; 
  3. Inclusive Development for Aspirational Bharat; 
  4. Reinvigorating Human Capital; 
  5. Innovation and R&D; and 
  6. Minimum Government and Maximum Governance. 

It is interesting to note that all the first five pillars are embedded in the various UN Sustainable Development Goals (SDGs). 

The Infrastructure Boost

The Budget proposes a sharp increase in capital expenditure having provided INR 5.54 lakh crores — 34.5% more than the of 2020-21 estimates. CAPEX is critical to businesses especially the small and medium sized ones. This increased expenditure will go a long way in alleviating the scars of the pandemic.

Moreover infra project spending will also generate employment in the medium term directly and thereby increasing demand by putting cash in the hands of the labourers in the rural and suburban zones. 

To help fund infrastructure projects across their lifespan a development financial institution (DFI) would be set up. The FM said a “professionally managed” DFI would soon be set up, and the government would come out with a bill to introduce it in the budget session of Parliament.

The DFI is proposed to be capitalised with Rs 20,000 crore and is expected to have a lending portfolio of at least Rs 5 lakh crore within three years time, adding that it is part of a three-pronged plan to increase investment in the economy.

The budget also proposes to raise custom duty and import tariffs to promote domestic manufacturing. The infrastructure investment coupled with mild protectionism will pave the path for the formation of an Atmanirbhar Bharat in the longer run.

The infrastructure investments are broadly of two kinds. The first kind which promotes growth directly and the second kind which has a broad development objective. The budget has beautifully balanced the allocations across the two kinds as is depicted in the table above.

Raised Healthcare Spending

The major development – oriented spending allocation has been made for the healthcare sector. A holistic approach to health (by strengthening Preventive and Curative care, and Wellbeing) and increasing its allocation to almost Rs 65,012 Cr is undoubtedly a great move in the right direction.

In the last 15 years, the allocation to the Department of Health and Family Welfare has increased from Rs 11,366 crore in 2006-07 to Rs 65,012 crore in 2020-21.  Over the period 2006-20, the Compound Annual Growth Rate (CAGR) has been 13%.  CAGR is the compounded annual growth rate over a certain period of time.

Allocation to the Department of Health and Family Welfare (2006-20) (in Rs crore)


The allocation to the education ministry for the coming financial year is Rs 93,224 crore – less than what was initially promised last year, but about Rs 8,000 crore more than the revised estimate.

With COVID-19 closing schools for a large part of the last year and education moving online, the stark digital divide in Bharat meant that many lost out on educational opportunities. The planned expenditure for this year is lower than the two previous years and possibly could have been more generous. Nonetheless it is a healthy allocation.

MNREGA allotment: a three year high 

The planned expenditure under the National Rural Employment Guarantee Scheme for the financial year (2021-22) is higher than that of the last two years, but of course lower than the actuals of 2020 simply because of the massive stimulus package in response to the disruption caused by COVID.

This is a welcome step keeping in mind the unemployment figures. 


The Fiscal Window Relaxation 

(FRBM & dependence on Tax Buoyancy, Asset Monetization and Divestment)

Finance Minister Nirmala Sitharaman has pegged fiscal deficit for the coming year 2021-22 at 6.8% of GDP and aims to bring it back below the 4.5% mark by 2025-26. The Modi government has been especially careful in not letting the fiscal deficit go beyond 4% abiding by the FRBM.

The original fiscal deficit target for 2020-21 was 3.5%. However, in reality, the deficit shot up to a high of 9.5% of GDP due to the double impact of the COVID-19 pandemic — low revenue flows due to the lockdown and negative economic growth clubbed with high government spending to provide essential relief to vulnerable sections of society, as well as a stimulus package aimed at reviving domestic demand.

In this budget however the government has stepped on the accelerator and is more aggressive in leveraging fiscal room with an estimated fiscal deficit of 6.8% but at the same time plans to bring it down to 4.5% within four years.

Now the question is how large is 6.8%? In order to wrap our heads around the figure, let us look at comparative figures of debt to GDP ratio (which is an indicator of a country’s leverage) across the developed and developing economies. The table below clearly shows that Bharat’s debt to GDP is way lower than most in the cohort, which in turn insinuates towards Bharat’s fiscal responsibility. Thus we can easily afford the fiscal expansion with no loss of credibility.

In 2021-22 the government proposes to spend Rs 34.83 Lakh Crore, higher than the budget estimate of Rs 30.42 Lakh Crore in the previous year as well as the actual expenditure of Rs 34.5 Lakh Crore.

Now, how to finance this expenditure? The government will rely on three major sources:

  1. Increased tax & duty collections
  2. Asset Monetization
  3. Disinvestment

Tax Regime: The Budget keeps tax structures reasonably unaltered. The government will try to improve collections by improving compliance.

Asset Monetization: The government will transfer five operational roads, with an enterprise value of Rs 5,000 crore, to the Infrastructure Investment Trust (InvIT) of the National Highways Authority of India (NHAI). It will also transfer transmission assets of Rs 7,000 crore value to PowerGrid’s InvIT.

Besides, Indian Railways will monetize its Dedicated Freight Corridor (DFC) assets for operations and maintenance, after commissioning, while the government will also come out with the next lot of airports for monetization through operations and management concession.

Operational toll roads of NHAI, transmission assets of PowerGrid, oil and gas pipelines of GAIL, Indian Oil and Hindustan Petroleum, Airports Authority of India’s airports in tier-II and tier-III cities, warehousing assets of central public sector enterprises (CPSEs), among others, are the other infrastructure assets that will be brought under the asset monetisation programme.

Disinvestment: The fiscal consolidation path also factors in government’s receipts from sale of stake in public sector enterprises, or disinvestment. The government targets to get Rs 1.75 lakh crore from disinvestment in FY22. A number of transactions namely BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam limited among others would be completed in 2021-22.

The government has also proposed privatisation of two public sector banks, other than IDBI Bank, and one general insurance company in FY22. In 2021-22 the IPO of LIC is on the cards as well.

The Financing Rationale:  Now is the disinvestment route a great way of financing instead of ramping up taxes? Let’s delve into this deeper. With the opposition hurling accusations of “putting the country up for sale” this for sure was a bold move and possibly a paradigm shifting one. Why? The question essentially boils down to increased taxing versus disinvestment. Why not increase tax rates?

A common argument could be that higher tax rates would lead to lower disposable income in the hands of individuals and thereby lower spending. But then that argument may not be entirely accurate. Barely 1.6% of Bharat’s population pays taxes. And as the first course in Macroeconomics will tell you, the propensity to consume is inversely proportional to income. With the minimum taxable income pegged at 5 lakhs increasing disposable cash in the hands of the tax paying clan is clearly a sub-optimal strategy to boost consumption and thereby the demand side of the economy.

It would rather be better to raise tax rates (both income and corporate) in a progressive taxation scheme and put money in the hands of the lower income group who have a higher propensity to consume. But then raised taxation would make Bharat’s economy a less attractive destination for private investors. That in turn will have a negative spiral effect on future growth and thereby employment. Thus this is a tight rope walk.

The government hence decided to prioritize the investor sentiment and kept the tax rates unaltered. There are also cap-relaxation in terms of FDI/FII regulations. The insurance sector for example will allow an FDI of up to 74%. The estimated FDI inflow in the 21-22 financial year is also markedly high as depicted in the figure below.

Instead the chosen deficit financing tool is disinvestment in public sector enterprises. And I would call it a master – stroke. Why? The answer lies in the massive liquidity in Bharat’s (and global) equity and commodities market.

A lot is being talked about why we should not be elated about the Sensex going north of 50000. And the argument cited is that the soaring Sensex is not necessarily a reflection of the economy but a result of an injection of a large amount of disposable liquid cash flowing around in the economy. The point isn’t entirely incorrect.

What else can explain the rise in gold prices even when the economy was shrinking or the staggering 400% rise in Bitcoins since July, 2020 when the entire world was reeling under COVID.

Now the question is, is there a way to exploit this irrational bubble to address the fiscal condition of the country? And that is where this budget steps up and grabs the opportunity through equity disinvestment in LIC and PSBs. This is the government playing the valuation game judiciously.

It is a bus which should not be missed. With the investor confidence in place (due to the double whammy of improving ease of doing business and tax reliefs), the asset monetization and disinvestment strategy is perfectly timed.

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Dripto Bakshi
Dripto Bakshi
A PhD in Quantitative Economics, working as a Data Scientist in a multi-national bank.


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