What Finance Minister Needs To Do To Make History: The 10 Big ‘Asks’ From Budget 2021-22

With less than two weeks to go for the Union budget, expectations about Big Bang announcements have risen. Not least because Finance Minister Nirmala Sitharaman has herself talked about wanting to see a “post-pandemic budget never seen before in a hundred years.” It is not clear what she actually meant by that, but it has given rise to hopes for another 1991 kind of breakthrough budget-cum-liberalisation package from the government.

Given the relative unimportance of Union budgets in today’s complex economic landscape, it would be difficult for any finance minister to live up to the hype. But if any budget deserves to be given top billing, the 2021-22 one bids fair to be the one. The two things we don’t need are clear: incrementalism, the hallmark of the Narendra Modi government, is not going to work. And two, fiscal fundamentalism is also not needed, at least in the next year. We need to take the big risks now in order to get the economy out of the ditch and enable animal spirits to take hold once again.

Here are 10 big asks from the budget to be presented on 1 February, including the reasoning behind each one of them.

First, Sitharaman has to abandon fiscal conservatism in the coming year. According to many reports, 2020-21 will probably report a very high fiscal deficit of around 7-7.5 per cent. The State Bank of India’s economic team estimates the figure at 7.4 per cent.

The primary objective in 2021-22 should be to retain this level so that there is fiscal space to make the investments needed to revive growth and fund the massive costs of vaccinating millions of vulnerable people in India so as to achieve herd immunity.

In this context, a Business Standard report claiming that the government may be aiming for a fiscal deficit target of 4 per cent by 2025-26 makes sense. It means the focus is rightly on growth, and not on presenting a pretty picture of fiscal consolidation.

Some fiscal fundamentalists will ask: what if inflation rages? The answer is simple: the vulnerable sections of society can and should be protected, and the headline retail inflation numbers can be managed through supply side and administrative measures on food and fuel, both of which are amenable to such management.

If, perchance, inflation rages above 6 per cent, one can even allow the rupee to rise against the dollar and bring it down. We have enough stocks of food and foreign exchange reserves, not to speak of leeway to cut petro-taxes, to manage all the three main components of non-core inflation.

Second, given the likelihood of large slippages in bad loans – the RBI says it could rise to as much as 13.5 per cent by September 2021 – the government must plan on providing for a larger dose of capital infusions into public sector banks. Even though public sector bank shares have risen fast in recent weeks, their ability to raise lots of capital from the markets cannot be assumed.

The creation of a bad bank to take away their excess load of bad debts, and a holding company for bank shares will help meet some of the challenges in raising capital, but government infusions are a must. More so if banks have to fund credit expansion next year.

This is another reason why the fiscal deficit target for 2021-22 should not be aggressive. It is always better to keep the target high and, if growth and revenues pick up during the year, Sitharaman can always announce a big improvement by the time the next budget is presented in February 2022, instead of doing the opposite: be too optimistic on targets, and then announce a slippage. Fiscal credibility is built by going one better on your promises, not by allowing your promises to remain a dead letter.

Third, the government must budget for large goods and services tax (GST) compensation numbers, especially the amounts due to be paid to states in this fiscal.

States need the fiscal space to invest in infrastructure, including health infrastructure and vaccines. Making them borrow too much with the promise of amortising this debt by continuing the GST cess beyond 2022 is not a great idea. The sooner we remove the cess and rationalise GST rates to a simple three-tier structure the better.

If a high central fiscal deficit allows for a faster rationalisation of GST, so much the better. Kicking the can down the road is not required for no one can be sure that another crisis will not meet us head-on in the next five years. A one-time and comprehensive fix for the GST structure, including a one-time clearance of all GST compensation dues, should be accommodated through a higher central fiscal deficit for 2021-22.

Fourth, given the backdrop of the Covid challenge, which India has actually handled pretty well, a massive and long-term increase in healthcare spends has to begin from 2021-22. India’s current public spends on healthcare add up to barely 1.29 per cent of GDP, though this would have shot up in 2020-21, when the numerator (health spending) would have gone up sharply and the denominator (GDP) has shrunk.

Post-pandemic, we should not only push public spends to 2.5 per cent of GDP, but gradually raise it to 4-5 per cent. The year in which this transition must begin is 2021-22.

Fifth, infrastructure clearly needs a big fillip, and this means not only roads and railways, but also ports, airports, telecom, healthcare, education, and social infrastructure. Defence, which has seen its share of spending stagnate and fall for many years, needs a big boost, and can be a key driver of Atmanirbhar Bharat in manufacturing.

Over the last decade, defence’s share of GDP has fallen from 2.5 per cent to 2.1 per cent, even though this trend would have temporarily reversed this year due to the GDP shrinkage and forced increase in defence spends due to the situation on the China border. Given massive defence needs over the next decade, India must push up spending to 3 per cent, perhaps by pencilling in an annual 0.2 per cent rise every year for the next five years.

The money can be raised through higher budgetary allocations and/or a non-lapsable cess on all taxes. Sales of large tracts of defence lands could help bridge the gap between required spends and available resources. Many defence properties are in big cities and there is a strong case for moving them out to new enclaves in the hinterland, where security can actually be better, even as costlier urban land can be sold for raising revenues.

Sixth, 2021-22 needs to be a big year for telecom expansion, especially through the auction of 5G spectrum. However, we need a big shift in how auctions are used to raise revenues in future.

Currently, spectrum is overpriced, and this has been a major reason why telcos are forced to raise tariffs frequently to keep their heads above water. There is a case for drastically lowering spectrum reserve prices, especially after the Supreme Court judgment defined “adjusted gross revenues (AGR)” so liberally as to bring in huge revenues for the government with retrospective effect.

The case for lower spectrum prices can be stronger now that AGR can be made to generate more. However, the best idea may be to lower all telecom spectrum costs, with government making up from income taxes what it may lose from lowering spectrum charges.

Seventh, the prime aim of agriculture policy over the next five years must be to reduce the number of farming households and suboptimal land holdings by incentivising small and marginal farmers to sell or lease their lands so that productivity can be raised. Indian agriculture cannot account for 15-16 per cent of GDP and support three times that number in terms of dependent population. The best was to double farmers’ incomes is by halving their numbers and getting the surplus hands to seek jobs in urban areas.

This process can be incentivised by the government making more cash payouts to small and marginal farmers, and devising financial products that assure them of annuity incomes against land they lease out or sell. An acre of farmland that sells for Rs 15 lakh, if invested in an annuity yielding 8 per cent per annum, can generate Rs 10,000 of monthly income per household.

Even if the interest rate needs a subvention from the government, it would be worth it to get small farmers out of farming. Farmland that is of lesser value may need a different kind of fiscal support, but clearly the end-goal must be obvious: get small and marginal farmers out of farming.

Eighth, a key part of revenue mobilisation in 2021-22 should be through privatisation, including sale of land and properties belonging to public sector entities. Bharat Petroleum, Concor, Air India, Shipping Corporation, and some of the banks should be sold, and so must a significant stake in Life Insurance Corporation.

Instead of just bringing private investment in coal and mineral mining, there is no reason why even Coal India or some of its subsidiaries with long-term mining leases should not be privatised, with government merely retaining a golden share to ensure that energy security and haphazard mining do not become the norm.

Ninth, with growth delinking from jobs in an era of massive infusions of capital and digital technology, significant sums must be invested to subsidise new job creation and elimination of a large chunk of social security costs – especially the employee’s contribution to provident fund and medical insurance.

Job creation needs a focus on incentivising sectors that are labour-intensive, lowering the cost to firms for taking on additional employees, and increasing the take-home salaries of new workers. This is the sustainable way to boost demand and jobs, which then feed into each other in a virtual cycle of growth and jobs.

Tenth, given the disproportionate impact Covid has had on various sectors, special pick-me-ups should be targeted at sectors that bore the brunt of the pandemic’s economic costs – like tourism, some kinds of services, etc. A broad-based demand stimulus is not required, but focused spends on sectors that generate a large number of jobs and where the economic devastation has been large is the need of the hour.

To be sure, there are many other things needed from the Finance Minister, but these are the big “asks”. If delivered, the Finance Minister would have done a great job. So far, she has been crisis-managing; it is now time to go for the big hits.