The government’s financial positions ahead of Union Budget 2021 is essentially like the rather satirical definition George Bernard Shaw provided for a budget; “An attempt to equate your earning capacity with your yearning capacity”. Needless to say, the yearning capacity this year is immense. Here is a quick take.
Infrastructure needs huge investments and that cannot be wished away. Rural India must be pampered as the agricultural sector is likely to grow at +3.4% as per GDP Advance Estimates. This is against the overall GDP contraction of -7.7%. Millions have been displaced and most of the middle and lower income groups have seen their purchasing power diminished by the lateral impact of COVID-19. It is in this background that Union Budget 2021 will be presented by Nirmala Sitharaman on 01-Feb.
How serious is the revenue gap for FY21?
At the current juncture, the revenue gap is more about estimates. While GST revenues have picked up in December 2020, the loss of revenues on the back of lower production has been immense between March and September. Same is the case with direct taxes. Tax filings have been robust but revenues are likely to be lower due to a combination of jobs losses and lower income levels.
Budget 2020 had touted disinvestment as the big story of fiscal year 2020-21 and was supposed to generate Rs210,000cr. However, this presumed the 10% divestment of LIC, which was supposed to raise close to Rs1,10,000cr. LIC may not happen in this fiscal year due to statutory changes required. Even Air India, despite the progress on bidding, may have to wait for the next financial year. If you add the shortfall in direct taxes, indirect taxes and divestments, the revenues could be short by nearly Rs700,000cr. That is a huge gap.
Where will Budget 2021 spend on?
At the outset, this is likely to be a tight budget but focused spending will be inevitable. Government spending in Budget 2021 is expected to be focused on the following.
Infrastructure projects are likely to get priority, especially the ones like roads and highways which hold tremendous jobs potential. It could be like hitting two birds with one stone for the government.
Budget 2021 is expected to invest substantially on farm infrastructure. Today, this gap has been driving inflation higher, even in the midst of a good Kharif. This will include gate infrastructure, cold chains, export infrastructure etc.
One major outlay in this budget will be the health sector. The government has committed to vaccinate all frontline health workers from the PM Relief Fund. Budget-21 will enhance allocations to last mile health infrastructure and delivery mechanisms. It is also expected that the government may largely subsidize the vaccination drive.
You can expect higher outlays for employment generation programs like the MNREGA to take out some of the pressure on jobs. The focus will be more on expanding the MNREGA programs in rural areas to also accommodate migrant workers.
Finally, don’t rule out some relief on the tax front for the middle class. This lower and middle income segments suffered from falling incomes and lower yields on their traditional debt investments. Some additional tax reliefs or enhancements of traditional tax saving sections may be on the cards.
What could be the big revenue stories of Budget 2021?
The revenue gap is certainly there and it is going to be much wider than anticipated. Even as revenues in FY22 are likely to pick up faster than expected, higher levels of expenditure will put pressure on the revenue gap. Here are some big revenue stories for Budget 2021.
Divestment of LIC and Air India will be big on the agenda for Budget 2021. It remains to be seen what is the budget for divestment revenues but it is surely going to higher than the previous year to make up for COVID shortfalls.
Apart from LIC and Air India, the will rely on disinvesting its majority stake in a slew of companies including CONCOR, Shipping Corporation of India and BPCL. All these could go under the hammer in the next fiscal.
One method the government will surely explore is the monetization of government owned assets and this could include large land parcels, which could be hived off into a separate entity for easier monetization.
The government may also look to hit two birds with one stone. To simultaneously enhance revenues and to give a boost to Atma Nirbhar Bharat project, the Budget 2021 may look to raise import duties on specific products.
Over the last few years, the government has earned substantial revenues through excise duties on petrol and diesel. However, with Brent Crude at $56/bbl, that leeway is very limited. If oil prices taper lower, that could be icing on the cake for Budget 2021.