Union Budget 2021: Timely dissemination of vaccine, easy financial conditions may trigger growth in economy

A medical worker inoculates a colleague with a Covid-19 vaccine in Kolkata. AFP

India has met with success in containing the pandemic, keeping infections under control into early 2021 (80 percent drop in daily caseload versus September 2020), breaking the linkage between higher mobility levels and unlocking of the economy. Bucking the trend in the US, Europe and other parts of the world which are inundated with multiple waves and trickier variants of the virus, the manageable situation in India has allowed for activity to normalise at a much faster pace than earlier anticipated, with sectors apart from contact-sensitive sectors largely back to levels pre-pandemic.

Timely dissemination of the vaccine, easy financial conditions via propping rate-sensitive sectors as well as narrowing spreads for corporates, and better global outlook, should lift the cloud cast by the pandemic, allowing India’s growth to turn more even compared to 2020.

While activity normalises after a challenging year, the pandemic has dealt a one-two blow to the budget math, which will, unsurprisingly, double the FY 2021 deficit versus target. To gauge the mix of priorities for FY 2022, we expect the budgetary push to be aligned with pandemic-led macro shifts.

First, despite to-date success, the authorities will seek to keep the curve flat, with the vaccination rollout seen as a durable speed-breaker. Apart from making allocations for the vaccination programme (0.2-0.5 percent of GDP depending on how many are supported by the state), a push to expand the nationwide insurance scheme, strengthen the welfare construct and accelerate infrastructure push, i.e. hospital beds and physicians to population ratios, will
be a priority.

Healthcare expenditure has accounted for less than 2 percent of GDP in recent years and is expected to be ramped up. On the financing end, changes in the direct, exemptions or indirect tax rates are not on the cards after an alternative tax slab structure was introduced last year.

A COVID cess might be on the cards to cross-subsidise the vaccination rollout.

Secondly, normalising the K-shaped recovery will be key. Notwithstanding the recent rebound in consumption (the function of pent-up demand, high-income and protected incomes) and a sharp improvement in corporate profitability, recovery has been asynchronous.

Towards this end, the Budget might raise allocations to the MNREGA programme, reinforce measures announced as part of the support package to incentivise hiring, highlight expansion of the production-linked incentive (PLI) scheme to draw more manufacturing activity which will carry positive multiplier effect for incomes and employment prospects etc. Funding, credit guarantee schemes and liquidity support for Micro, Small and Medium Enterprises
(MSMEs) will stay and be enhanced in the event of further stress.

Thirdly, domestic savings rose sharply last year in mid of the lockdown, overbroad caution on employment and income conditions. While part of this spike will moderate as the economy recovers, there is a need to channelise these private sector savings to higher investments, without endangering external balances.

This is likely to coincide with higher public sector participation, including catalysing the National Infrastructure Pipeline. To facilitate mobilisation of funds, the formation of a dedicated Development Finance Institution might be considered, with a concurrent thriving corporate bond market also seen as a viable option for long-term financing, which remains a long-standing demand.

Next, supporting financial sector stability will be crucial as the moratorium ended in August 2020 and one-time restructuring window ended in December 2020 (without reclassifying the accounts as sub-standard), while the take-up rate for the recast facility was smaller than expected. While stress due to the economic shock is to be expected, most institutions have proactively prepared for it, including multiple fund-raising initiatives. ‘

Nonetheless, guidance on any government’s capital infusion plans in FY 2022 will be watched closely after Rs 3
trillion funding in the past three to four years, just as a cyclical rebound takes root this year.

Formation of a Bank Investment Company might also be proposed, with the nuances to guide the efficacy of the plan.
Finally, a medium-term fiscal roadmap will be awaited. The government is expected to propose an amendment to the FRBM Act in the Finance Bill, to steer the deficit glide path to 4.0 percent by FY2026, according to the press.

With the near-term math upended by the pandemic, a realistic roadmap would be a timely guidepost to aid the Centre and states formulate their deficit and debt targets over the next 3-5 years.

While the FY 2021 fiscal deficit is expected to more than double from the targeted -3.5 percent of GDP, consolidation in FY 2022 will be backed by strong nominal growth and higher revenue assumptions. We expect the FY 2022 fiscal deficit to be narrow to 6.3 percent of GDP, with upside risks to our estimate to surface from a higher nominal GDP assumption for the budgetary math by the government.

The writer is an economist and senior vice president DBS Bank, Singapore.