A Budget to be Remembered

A Dream Budget that lays the path for not only immediate post-Covid recovery but also high growth over the decade

An increase in the healthcare budget of 137%, increase in the budgeted infrastructure spending by 32%, which excludes the 2 lakh crores budgeted for states and autonomous bodies, privatisation of two public sector banks and an insurance company, a bad bank in the private sector to clean up the balance sheets of the banks, no increase in taxes combined with significant streamlining of the tax system, significantly enhanced fiscal spending to further the economic recovery that is underway even while providing a medium-term fiscal consolidation framework, including a plan for monetisation of assets. After the Pujarasque work done by the Atmanirbhar Bharat packages 1-3, which has ensured that India got through the historical pandemic with minimal damage and generated a V-shaped economic recovery, the Finance Minister played a Rishabh Pant like knock on Monday as she delivered a budget that will be remembered by history.

In an economy, the factor inputs comprise of the soft and hard infrastructure, labour and capital. Traditionally, labour and capital are regarded as the key factor inputs. However, since the soft and hard infrastructure increase the productivity of labour and capital, for purposes of analysing the budget, we can regard them both as factor inputs as well.

While the soft infrastructure stems from human development, the hard infrastructure comprises of the physical assets. Given the pandemic that has highlighted the key role of health, it has become a critical element of soft infrastructure. Similarly, the hard infrastructure enables private investment and thereby accelerates the virtuous cycle of investment, growth and consumption. This year’s budget will be regarded historic because it positively impacts each one of these factor inputs.

In India, an NIPFP study shows that the fiscal multiplier from investments in physical infrastructure has been very high – 2.5 in the year when the investment is made and 4.5 over a few years. Therefore, if we just consider the impact of the 5.54 lakh crores allocated for the implementation of the National Infrastructure Pipeline, this cumulates to 2.5% of GDP. Taking the multiplier of 2.5, 2.5% * 2.5 = 6.25% of GDP growth can be expected to stem from the spending on the infrastructure. This is above and beyond the significant ramp up in the Government’s capital expenditure since the months of October this year, as a result of which the revised estimate for the same would be 4.39 lakh crores instead of 4.2 lakh crores that was set out in the budget of FY 20. This increase of 4.5% when compared to the budgeted estimate is expected to manifest despite the washout in capital expenditure spending during the months of the lockdown.

The significant outlays that have been provided for roads and railways will especially enable better logistics infrastructure in the country and thereby reduce the costs of doing business for Indian companies. These add to the several reforms that have been launched in Atmanirbhar Bharat 1-3, including the labour reforms, the MSME definitional changes, the Production Linked Incentives scheme, and will enable the manufacturing sector in the country. The bill that will provide for the infrastructure financing corporation in public sector is intended to enable the setting up of the infrastructure financing institutions in the private sector too, which will add financing options to the public spending that has been provided.

The impact of the gigantic increase in the healthcare spending would of course manifest over time. But, the INR 35000 crores budgeted for vaccination together with the promise for providing all necessary amounts during the year acts as a vaccine for the economy as well. The impact of this will be felt in the contact-sensitive service sectors, where pent up demand can be expected to come back with a vengeance.Therefore, this spending on vaccination will have its impact this year itself. The streamlining of the expenditure through the Atmanirbhar Bharat Swasthya Yojana, focused on the full value chain of healthcare from primary through secondary to tertiary care, can be expected to help increase the productive impact of the healthcare spending. The significant increase in healthcare spending signals a key departure in the emphasis placed on health and will benefit the common man over the medium to long-term. The improvement in human development that this is likely to herald should manifest in higher productivity of labour and thereby improvement in the overall productivity.

Apart from the signal change in healthcare, this year’s budget could mark the start of the transformation of the financial sector in India. Three key initiatives stand out in this regard. First is the setting up of a bad bank, where the implementation will be done via a private sector structure to enable decision-making that is critical for value generation in stressed assets. Second, is the proposed privatisation of two public sector banks and an insurance company withthe necessary legislative changes that would be made to enable the same. Finally, the increase in the threshold for FDI in insurance from 49% to 75% with the necessary safeguards.

Overall, the first budget of the decade has provided a significant roadmap for the Indian economy to not only return back to the pre-Covid growth path but also accelerate growth over the decade. Madam Finance Minister, You have delivered what you promised… a budget for history to remember!

Dr KV Subramanian,
Chief Economic Advisor
Issued by PIB Kohima