Budget 2021: The return of Keynesian Economics

As the finance minister Mrs. Nirmala Sitharaman rose to present this year’s budget, she must have been mindful of the challenges- impact of global pandemic, jobless youth, farmers deeply peeved with the government, a middle class yearning for some respite and, industry waiting with bated breath for the government to kick start the economy and generate demand.

Catering to all of these stakeholders, the finance minister has taken a leaf out of Keynesian economic textbook and focused on debt funded government spending to usher in growth.

Let’s delve into the 7 key highlights.

1. Swastha Bharat

An outlay of ₹ 64,180 crores, including ₹ 35000 crores for vaccination and further to augment the healthcare infrastructure in urban health centers, setting up integrated labs, critical care hospitals, and impetus to the National Centre for Disease Control . In nutshell, improve access to quality healthcare for all sections of society.

The moot point maybe the rather long execution roadmap of six years and whether with typical government pace, this can be achieved.

2. Capital Formation

In sync with the USD 5 trillion-dollar economy vision, the budget has emphasized on manufacturing sector and performance linked incentive scheme. An outlay of ₹1.97 lakh crores spread over 5 years to fund creation of scale and size in 13 earmarked sectors. This will generate jobs in the SME sector and boost demand.

A similar thrust has been put on National Infrastructure Pipeline, comprising of 7400 projects, including those 217 completed at a cost of ₹ 1.10 lakh crores.

To fund the gap for those in pipeline, a Development Finance Institution has been envisaged to garner long term capital at affordable capital cost from Bond market. The idea seems sound on paper, yet given the long gestation period of infrastructure projects, the viability of capital cost and return on investment could be a cause for concern.

The overarching theme has been set by just one number, a 34.5% hike in capital expenditure from ₹ 4.12 lakh crores in 2020-21 to ₹5.54 lakh crores in 2021-22.

3. Biting the Privatization Bullet

To fund her spending spree, a disinvestment receipt of ₹1, 75,000 crores is budgeted, including that from IPO listing of LIC and possible privatization of two public sector banks, a carryover from the unfinished agenda of last year.

This will test the political resolve of the government given the extent of anti- reforms tempers pervading the current farmers protest.

4. Courting Foreign Capital

Another shot in the arm came in the form of raising the FDI limit in insurance from 49% to 74%. This is intended to further broad base the insurance market in India given the heightened awareness towards life and health insurance in the wake of the pandemic.

The capital adequacy clause of retaining a specific percentage of profits as general reserve seems a well thought out policy to allay any insecurity among investors and policyholders.

5. Settling the Bad Bank Debate

Even before the budget, there was much debate about the need for a bad bank. The economic survey has also alluded to the need for an asset quality review and transferring stressed assets to an alternative restructuring entity.

While details are awaited, Budget envisages creation of an Asset Reconstruction Company or an Asset Management Company to salvage value from the stressed assets of Public Sector Banks (PSBs). Although recapitalization of PSBs seems underfunded with only ₹20, 000 crores.

6. Keeping the Farmers Happy

This was the litmus test for the Finance Minister, given the spectre of farmer agitation against the three new farm laws. She was quick to point out various government schemes and more specifically the significant increase in MSP on wheat, paddy, and pulses over the last few years.

However, the concrete takeaway was a revised target of ₹16.5 lakh crores for agricultural credit and additional ₹10, 000 crores towards the corpus of Rural Infrastructure Development Fund.

7. Jittery Fiscal Stance

The rude awakening lies herein – a fiscal deficit of 9.5% of GDP for 20-21. There is a further borrowing requirement of ₹80000 crores which will be met through tapping the capital markets.
While the assurance to return to the fiscal discipline path by 2025-26 is the saving grace, government also admits that its tax and non-tax revenue source are inadequate and hence the reliance on borrowing to spur growth.

Since a large chunk of the outlay is slated for asset creation, a multiplier effect on employment and demand creation seems to be an embedded virtuous assumption. It would remain to be seem if rating agencies concur.

There is no doubt that this is an expansionary budget, cheered by the markets and the industry. However, the onus is squarely on the execution of projects, both in healthcare and infrastructure sectors, which by nature are fraught with uncertainty. The government will argue its case that to foster growth it has loosened its purse and rewind the clock to the good old day of the Keynesian multiplier.