Union Budget 2021: Recapitalise banks, spend on infrastructure, innovate on revenue side

The annual Union Budget will be presented on February 1. It is a constitutional requirement, since not even a single rupee can be spent from the exchequer without Parliament’s permission. The discussion and debate around the budget proposals might be heated, but given the majority of the ruling party, their passage is a given. The upper house of Parliament does not have a veto over the passage of the finance bill. Most of the budget-related measures and initiatives are probably frozen by now. Even so, it is worth speculating what they might be.

The budget is being presented under unusual circumstances. It is the first time in 40 years that a budget is being presented after a recession, i.e., when the national income has contracted. The expectation is that in real terms, GDP for the fiscal year 2020-21 fell by around 8%, and in nominal terms by around 4%. In normal times, of positive GDP growth, budgeting is done mostly as an extrapolation of the previous year. That is not to say that completely new and radical measures cannot be contemplated, but most projections and proposals on an aggregate basis are increments over the previous year. Thus, if nominal GDP grows by 12%, tax growth is budgeted at say 18-20%, and so on.

For next year’s budget, such increments to base line are not likely, nor are they appropriate. If anything, the finance minister is likely to pay little attention to the size of the fiscal deficit. Growth stimulus and employment generation are the highest priorities. Which means that the aggregate budget size could be as high as Rs 36 lakh crore, or about 20% higher than last year’s budget size. In turn, the size of the deficit, which is also the size of aggregate borrowing, could be as high as Rs 12 lakh crore, or about 6% of GDP.

Two areas where the central government needs to put more resources in the coming fiscal are in infrastructure and banking. Just a few months before last year’s lockdown, the finance minister had unveiled the national infrastructure pipeline, a collection of over 7,000 projects aggregating Rs 111 lakh crore of spending over a period of five years. Of course, the bulk of the spending will be from the private sector, both domestic and foreign. It will be a combination of equity and debt financing. That translates to roughly Rs 22 lakh crore to be spent every year. Surely, at least 10-15% of that should come via government sources, whether financed through sovereign infrastructure bonds or as directly provided seed money. Thus, the budget should make a provision of no less than Rs 2-3 lakh crore toward infrastructure.

The second area is that of banking. The recent Financial Stability Report of the Reserve Bank of India gives a sobering picture of bank capital requirement. During the lockdown phase, the regulator had shown much forbearance. We have had a moratorium and a standstill on the recognition of failed loan repayments. So, quite counterintuitively, the non-performing asset ratio of banks has improved in the September-ending quarter. But the day of reckoning is not far. When the moratorium period is over, and this issue is currently stuck in the Supreme Court, the NPA ratio might jump.

Additionally, as indicated by the K V Kamath committee report, there are 26 sectors undergoing stress, and those loans, cumulatively worth Rs 48 lakh crore need restructuring so that they are not classified as non-performing loans. As indicated by the RBI report, if the bad loan ratio rises to 12%, it would call for at least a Rs 2 lakh crore injection by the government into public sector banks. This capital injection is necessary to support loan and credit growth to the rest of the economy. If the economy has to grow at 7-8%, bank credit must grow at 15-20%, which means there has to be adequate banking capital to support such loan growth.

The Union Budget has to provide for this banking capital. Of course, it can also be raised by privatisation. All the distributed bank ownership can be consolidated in a holding super-company, which can invite up to 75% private investment. This is not as radical as it sounds, and indeed has been suggested by several committees. By privatising the holding company, the government can save some budgetary outgo. And by letting each public sector bank, which would become a subsidiary of the apex company, run by their respective boards, it will also improve the governance in those banks.

Apart from the two obvious big commitments on infrastructure and banking, there is a plethora of asks, from various sectors, such as healthcare, startups, renewable energy, education and skilling, rural employment guarantee, and so on. In particular, after the experience of the pandemic, surely India’s healthcare spending by the public sector must at least double to around Rs 6 lakh crore. If the vaccination is going to be provided free to all, as was promised before the Bihar elections, then that would mean an aggregate burden of at least Rs 2 lakh crore. Covering 500 million people with vaccines in about 18 months will be a herculean task. But not only will this be a huge confidence booster for business and consumers, it will also prove to be a de facto fiscal stimulus.

Beyond these big initiatives, there are committed expenditures such as interest payments on past debt (about Rs 6 lakh crore), food and fertiliser subsidies (Rs 3 lakh crore), military spending including the OROP pension cost (Rs 6 lakh crore). That leaves very little room for game-changing ideas or radical departures from the past. Perhaps this will be seen on the revenue side. Maybe floating a Covid bond or a sovereign dollar bond to raise resources? Or a gold amnesty scheme to unlock part of the huge horde in the country? We will find out soon enough!

(The writer is an economist and Senior Fellow, Takshashila Institution)(Syndicate: The Billion Press)