A sharp jump in capital expenditure points to a preference to solidify medium-term growth boost while also entailing larger multiplier benefits for the economy
The strong cyclical growth backdrop and global tilt towards loose fiscal orthodoxy were expected to see the government toe the preferred line of fiscal conservatism. Instead, they used this degree of freedom to improve the credibility of the budget math and adopt a more investments-focused view rather than boost demand in the short-term, with the latter already benefiting from the ‘unlocking dividend’.
We distil the Budget theme into three ‘R’s. First, is Realistic. Growth and revenue assumptions are conservative for FY21 and FY22, compared to the run-rate and consensus. While there is considerable uncertainty on the outlook, the math has preferred to err on the side of caution, building in the possibility that a sharper cyclical rebound, or revenue surprise might leave the deficit target narrower than the Budget outlines. Add to this, the FY21 revised expenditure assumes a nearly 50 percent increase of the April-December ’20 quantum of spending, in just the March ’21 quarter, which appears ambitious and thereby likely to see the final deficit lower than the revised estimate.
An area of optimism is, however, a relatively strong divestment target of Rs 1.75 trillion, after big misses in recent years. Hope is that the busier asset pipeline helps push the agenda forward, which might fare better if stake sales are frontloaded in the year.
Strong supply-side currents
The thrust on the Realty sector, rather than undertaking outright demand stimulus. There are strong supply-side undercurrents, with an emphasis on higher allocations to infrastructure, healthcare, lift in FDI ceiling, higher farm sector allocations and formation of specialised institutions. A sharp jump in capital expenditure points to a preference to solidify medium-term growth boost, whilst also entailing larger multiplier benefits for the economy.
A “National Monetisation Pipeline” of potential brownfield infrastructure assets is expected to be launched, with more economic corridors under consideration, besides higher roads/ highways, railways infra etc. as is the formation of an institution that will provide long-term debt financing, a bill to set up a Development Financial Institution (DFI) has been passed, with Rs 200 billion to capitalise the institution and plan to create a lending portfolio of INR5trn in three years. The Key will be to ensure that these DFIs treads where the previous avatars and their plans failed to fructify.
Central scheme under healthcare
Under healthcare, a new centrally sponsored scheme, PM Atmanirbhar Swasth Bharat Yojana launched with an outlay of about Rs 642 billion over six years (impact of 0.05 percent of GDP this year), which will be focused on better medical infra and availability. A larger thrust is on better coverage of water supply, urban cleanliness, vaccination etc. For the latter’s rollout, Rs 350 billion has been set aside i.e. 0.2 percent of GDP.
Apart from a strong pipeline for disinvestment (BPCL, Air India, Shipping Corporation of India, etc.) intended to be completed in FY22, the government proposed to, apart from IDBI Bank, privatise two Public Sector Banks and one General Insurance company in the year 2021-22. Required legislative amendments have been introduced in the Budget parliamentary session. Implementation and timely execution of these plans will be key to harness the full benefits from these initiatives.
The final ‘R’ is Restoring credibility, for instance marking a step towards improving transparency, loans to the Food Corporation of India (FCI) from the NSSF, which was previously off-Budget was brought back above-the-line, which translated into a 1.6 percent of GDP lift to food subsidies in this fiscal year. Concurrently, the medium-term framework has been revived, with a more gradual and less ambitious glide path towards below 4.5 percent by FY25-26, moving away from the maintaining the earlier and aggressive target of -3 percent of GDP.
Besides higher revenue assumptions, markets-based borrowings will be key to finance the FY21 and FY22 fiscal gulf. Apart from additional dated borrowing of Rs 800 billion for FY21 and FY22 will entail net borrowings of Rs 9.7 trillion, increasing reliance on domestic players – RBI (to a larger extent) and domestic banks to absorb the additional supply. The modus operandi will include more regular OMOs, liquidity-neutral Operation Twists and a possible hike in the banks HTM limits (from 2 percent currently). Foreign interests will hinge on the inflation outlook, rupee and global yield movements. Cost of financing is likely to rise gradually during the course of the year.
On rates, the central bank will be keen to maintain a steady ship, while modulating liquidity conditions to pare back part of the emergency measures introduced last year as well as narrow the wide gulf between the reverse repo and repo corridor. This calibrated normalisation process, with a focus on liquidity management, will need to be carried out whilst anchoring borrowing costs and keeping overall policy stance on a supportive keel, made more challenging by a high borrowing.
The writer is Economist and Senior Vice President, DBS Bank, Singapore
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