A budget just right for tough times, but for protectionism

By M Govinda Rao,

The prolonged lockdown periods amid the pandemic rendered the Budget presented last year completely irrelevant. The year saw many emergency spends to wade through the ruffled times. Although the fiscal part of the stimulus was not large, how the decline in revenues amid the contraction in the economy would impact the macroeconomy was never clear. With the economy on a recovery mode, there are hopes of continued support to it through elevated public spending in the coming year. The structural weaknesses in the economy were crying for reforms which were expected to be pushed in the Budget.

The Economic Survey presented on January 29 argued for the continued expansionist policy. The Survey argued that in an economy where the nominal growth rate is higher than the rate of interest paid by the government and when the primary deficit is zero, debt to GDP ratio declines.

The revised estimate of revenue collection for 2020-21 shows that the decline in revenue was 23% from the Budget estimates and the tax revenue collections were lower by 17.8%.

A ‘no harm done’ Union Budget 2021, on balance

As the government had to keep the expenditures high to save the lives and livelihoods of the people and revive the economy, it had to spend 13.4% more than the budgeted amount.

The increase in revenue expenditure is by 14.5% and capital expenditure is up by 6.1%.

The fiscal deficit for 2021-22 is budgeted at 6.8%. With the expectation of revenue collections increasing by 15% and the disinvestment target pegged at Rs 1.75 lakh crore, the expenditure estimate is rightly kept at about 1% lower than the current year.

As a ratio of GDP, next year is likely to see lower expenditure by two percentage points from 17.7% from 15.6% in the current year. The decision to continue spending to allow full economic recovery is on expected lines.

The Budget creates a new Centrally Sponsored Scheme, PM Atmanirbhar Swasth Bharat Yojana, in addition to the existing National Health Mission. The Budget speech states that Rs 64,180 crore will be allocated to the new scheme in six years, but the amount has not been specified for the current year.

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Budget is the continuation of the protectionist trend taking us back to the pre-1991 days. We seem to have fallen into the import substitution strategy in the name of Atmanirbharta.

The Budget seeks to remove exemptions on a number of items and increases rates on some others including some agricultural products. Like raw cotton, raw silk and yarn.

With the continued protectionist trend, there will be demands for increasing tariffs on more items.

This will lead to consumers paying a higher price for inferior products. The protectionist trend has started four years ago and is now taking a stronghold. This is retrograde in an otherwise promising Budget.

This is really most retrograde and certainly worrisome.

(The author was the Member of Fourteenth Finance Commission. Currently, he is Chief Economic Adviser, Brickwork Ratings.)