An Irrelevant Budget

It is time for pressing the reset button on the 2021 budget, factoring in a radically changed scenario and the diminished and damaged macros that it is founded on and needs to address

With a ferocious second covid wave having battered India, resulting in a national lockdown of sorts and a huge slowdown in economic activity, a lot has happened in the Indian economy, between 1st February, when the 2021 budget was presented, to now, in a matter of just about four months. It’s an enormous change in the economic topography of India, which has certainly not been for the better. Let us examine the very relevance and validity of the 2021 budget in June today and beyond in the current FY 2022.

In the run-up to the 2021 budget, the customary Economic Survey had estimated that the Indian economy will grow by 11% in FY 2022, as one of the basic assumptions that evidently went into the budget formulation. The CEA then repeatedly said that green shoots of recovery were visible to him and that the Indian economy had witnessed a sharp V-shaped recovery. The ruling party had also banished fears of covid, with the BJP claiming that the virus had been tamed, due to deft and ingenious management by the government. Jobs were trickling back and corporate results were buoyant, due to significant cost-cutting. In February the overall mood of the government was upbeat and the FM and her top team confidently predicted a rapid revival of the Indian economy in FY 2022.

It was this upbeat and bullish confidence and also complacence of the government, that was writ large on the 2021 budget proposals, as is evident from the FM’s budget speech. Here are some relevant extracts of her budget speech. She said:-

1. Today’s data shows that India now has one of the lowest death rates of 112, per million population and one of the lowest active cases of 130, per million. This has laid the foundation for the revival we are now seeing in the economy.
2. I want to confidently state that our government is fully prepared to support and facilitate the economy’s reset. This budget provides every opportunity for our economy to rise and capture the pace that it needs for sustainable growth.
3. She mentioned 2021 to be a year of many important milestones for our history, one of which she mentioned as the Haridwar Mahakumbh, which eventually turned out to be a super spreader.
4. For a $ 5 trillion economy, our manufacturing has to grow in double digits on a sustained basis.
5. I propose a sharp increase in capital expenditure and have thus provided Rs 5.54 lac crores, which is 34.5% more than the budget estimates for FY 2021.
6. I have estimated Rs 175,000 crores as receipts from disinvestment in budget estimates 2021/22.
7. On the fiscal front, in the matter of government spending she said that to ensure that the economy is given the required push, our budget estimates for expenditure in 2021–2022 are Rs 34.83 lakh crores. This includes Rs 5.54 lakh crores as capital expenditure, an increase of 34.5% over the budget figures of 2020-2021. The fiscal deficit in 2021-22 is estimated to be 6.8% of GDP. The gross borrowing from the market for the next year would be around Rs 12 lakh crores. We plan to continue with our path of fiscal consolidation. We hope to achieve the consolidation by first, increasing the buoyancy of tax revenue through improved compliance and secondly by increased receipts from monetization of assets, including public sector enterprises and land.

But, with a fierce second covid wave, taking a complacent and thus ill-prepared government by surprise, resulting in massive covid casualties and also triggering a lockdown and economic disruption, the Indian economy in June 2021 is far weaker and emaciated than what it was in February when the 2021 budget was presented. As the rating agency Moody’s says, the decline in economic activity due to the second covid wave, has built up risks of a slowdown in growth, weak government finances, and rising financial sector risks, which are a risk to India’s credit profile and rating. It further says that as uncertainty persists, the damage to the economy due to covid 2, will be far worse than what it was in covid 1.

Further due to the decline in the economy, SBI has slashed its growth estimates for FY 2022 for India, from the earlier 10.4 % to a moderate 7.9% now, and expects at best a W-shaped economic recovery. It points out that even this growth rate, is only due to a low base effect. FICCI’s recent Business Confidence Survey says that the demand conditions in the current FY 2022 are expected to remain weak, with household income severely impacted and the past savings already consumed by the first covid wave.

The fact of the matter is that what may have looked hyped, but yet maybe a bit plausible in February 2021, is no longer so, whether in respect of the government’s growth estimates or the expectation of the return of jobs, household income, and consumer demand and spending and the state of government finances itself. Uncertainty prevails and so does confusion, with someone as senior as the CEO of HDFC Bank saying that for the first time in so many years, we may not have a grip on what’s happening and a C Voter Survey finding which says that the living standards of a large number of people in India have fallen and that most do not see any ray of hope in the coming twelve months. This was not the scenario in February 2021 when the budget was presented, but it is so and more so bleak now.

As per a recent Reuters report, it is a battered and shattered Indian economy at present, due to the second covid wave. It says that:-

1. The cheque bouncing rate in May 2021 has doubled to 21%, from a year ago and credit card defaults have risen to 18%.
2. There is a surge in job loss and debt default.
3. The impact of the second wave has been devastating and economists are downgrading India’s growth estimates.
4. Covid deaths have dealt a psychological blow and consumers are reluctant to spend, because of the lockdown, rising fatalities, surging unemployment, and fear of a third wave.
5. It says that the sale of goods including grocery, apparels, footwear, and beauty products are down by 49%, auto sales including two and four-wheelers are down by 30% in April and could increase to 60% in May, and unemployment has touched a 12 month high in May 2021.
6. And finally, the damage to the economy is deep and rules out any V-shaped recovery or a quick bounce back.

Also Read: RBI Keeps Repo Rate Unchanged At 4%, GDP Forecast Cut To 9.5% For FY22

As a pure statement of the government’s finances and cash flow for the year, ie. where is the money coming from and where will it be spent during the year, which the budget inherently is, the budget that was presented in February 2021 is no longer quite valid and relevant in terms of this radically changed and diminished position of the Indian economy. A receding economy means receding government receipts and that places a question mark on the government’s budgeted spending.

While the FM says that it is too early to say so and that the budget’s expenditure package should be allowed to play out, since it was designed for a covid affected economy and the CEA chips in to say that the budget numbers were relatively very conservative and hence the impact of the covid second wave will not be too large, but, we think otherwise. An entire quarter of FY 2022 looks likely to be lost and the deep and long-term distress due to covid 2 is there to see all around. And that will certainly dampen and depress government receipts and thus its expenditure too. It is time for pressing the reset button on the 2021 budget, factoring in a radically changed scenario and the diminished and damaged macros that it is founded on and needs to address. The dominant feature of a budget reset has to be a genuine and generous fiscal stimulus to support and revive a doddering economy. Let the real situation and the real numbers emerge before we are swamped by a third covid wave, which we hope is not.