Despite announcing some good policies in the 2021 Union Budget, the Narendra Modi government will find it difficult to implement them in the long run, according to experts.
The 2021 Union Budget, presented by Finance Minister Nirmala Sitharaman, was well received by stock markets with the SENSEX soaring to an all-time high of 50,000 points. Contrary to fears of increased taxes and the introduction of a COVID-19 cess, the budget focused on reducing the fiscal deficit while also increasing expenditure.
It also announced plans to sell two private sector banks and a general insurance company while also announcing the plan to set up a development finance institution.
However, it may find it difficult to execute a number of policies in the budget say experts.
"Some of the expenditure that they are showing they may or may not be able to do it. There is a capacity issue. You would know that state governments were given money and that money is all parked in T bills. So, a large part of this expenditure also depends on the capacity of state governments to execute," Shankar Aiyar, columnist and author told BOOM.
"Domestic consumption is what propels the growth. And for that, I think the announcements will not be enough. This government does one thing very well. Intention is always well executed, packaged. But when it comes to implementation, they really struggle unless the Prime Minister puts his weight down. Things that the Prime Minister put his weight behind like the Ujwala scheme, Jan Dhan Yojna, rural electrification, they took off. But where the general John Doe of the government has to manage I think they really struggle to get anything going," he added.
While agreeing with Aiyar on the government's inability to execute plans, columnist and author Vivek Kaul applauded the government for its intentions.
"The fact that the government decided to clean up its books and at one go, that really was a surprising part. Because they are now declaring food subsidies properly and not hiding behind cash accounting. That added at least three lakh crores to the fiscal deficit. And this in a year where tax revenues have crashed, disinvestment receipts are around 15% of what they were expected to be. I think this has been a bold move. And it's surprising, because the Narendra Modi government isn't really known to make bold moves on the economic front," he said.
"And then there are, you know, a few ideas which they are trying out.They're trying to sell excess land with public sector enterprises, they are trying to get in a bad bank, but a development financial institution is being planned. One may agree, or one may not agree with these ideas, but at least there is some thought that's gone behind the entire thing, which wasn't the case always so," he added.
Edited excerpts from the interview follow
Govindraj Ethiraj: Shankar, what are your key takeaways from what you saw in the Union budget statement and speech?
Shankar Aiyar: My key takeaway is that there is a sense of recognition about the inventory of sins that had piled up. And this budget actually clears some of that inventory. There is transparency about how they are going to address some of the issues. I think they've had some idea that, you know, for instance, the shifting of off budget items into the budget. It's both optics and economics, obviously, you don't pay subsidy by borrowing at higher levels. Government of India can borrow cheaper than FCI can from an international small savings. So, some of the thinking has gone through.
I like the aspect of transparency, openness. Of course, it also enables the government to give a political message that they've spent a lot of money. And that expansionary optics that they have presented also allows them to clean up some of the stuff. Now, if you actually look at the budget carefully, the expansion is not so much about what they did, but also about what they couldn't do. So, of the total deficit that 9.8 about 3,10,000 crores is FCI about 1,70,000 crores is failed disinvestment about 30% or odd. I mean, final figures of tax collections will know he later, but for good four or five months, GST was hit so, you know, let's assume 40% tax. So, it's a very good place to plan the next few years. Although, I mean, I still find the 1,70,000-crore disinvestment target rather ambitious.
GE: So, are you saying a key takeaway is transparency Shankar? I mean, there's nothing else that really jumped out from in terms of what will affect the average person on the street?
SA: Well, you know, all plans are ifs and buts stories. So, if the capex happens, if construction starts, if there is offtake of cement, steel, creation of jobs, then you assume that in the peri-urban and rural economy, people will buy motorbikes, cars, whatever consumption will go up, and then there will be revenues and there will be growth.
Now, I'm optimistic about the road projects, but I'm not so optimistic about the other CAPEX that they're talking about. So, the potential is there. I'm happy about the direction that investment led thing that they have done because in India, transfer of money is always a difficult thing, whether people will spend not in any way both theories, whether it is the percolation theory or the direct transfer to consumption theory are both being distributed, so.
GE: Vivek, your thoughts on what you saw and what you took away?
Vivek Kaul: I think I mean, I agree with Shankar on the transparency bit, given the fact that this has been going on for at least more than a decade. The fact that the government decided to clean up its books and at one go, I mean, that really was a surprising part because that clearly added, you know, because they are now declaring food subsidies properly and not hiding behind cash accounting. That added at least three lakh crores to the fiscal deficit. And this in a year where, you know, tax revenues have crashed, disinvestment receipts are around 15% of what they were expected to be, and non-tax revenue. I mean, nobody surprisingly, has talked about it, you know, the dividend, the profit that, you know, the public sector enterprises share with the government, I mean, that has also crashed big time.
So, I think this has been a bold move. And, and it's surprising, because, you know, the Narendra Modi government isn't really known to make bold moves on the economic front. So, I think that that that was my one big takeaway. And then there are, you know, a few ideas which they are trying out, you know, they're trying to sell excess land with public sector enterprises, they are trying to get in a bad bank, but a development financial institution is being planned. I mean, one may agree, or one may not agree with these ideas, but at least there is some thought that's gone behind the entire thing, which wasn't the case, always so.
GE: You talked about one of the aspects of income, which is the non-tax revenue. What are the key revenue sources for this government at this point of time? And what are the key expenditure heads?
VK: Most newspapers had sort of led with the idea that the government is basically spending a lot of money in this budget and acting as a spender of the last resort and then trying to push up the economy. But when I looked at the numbers, to my surprise, I found that, there is very little fiscal expansion that is happening between this year and next. Even this year, what is being passed off as a fiscal expansion was planned pre COVID. It wasn't like COVID happened, and then, suddenly the expenditure went up. So, net net, I think, this entire idea that this is a budget, which comes with fiscal expansion is really not true, at least the numbers don't show that, and not to the extent that the finance minister has been, talking about when she said that, "We've been trying to spend spend and spend", that's not true.
The other thing is, if you look on the expenses side, the allocation to a scheme, like the National Rural Employment Guarantee scheme has been cut from around 1,12,000 crore this year to 73,000 crore next year, which I sort of found surprising given the fact that this year the scheme has done a decent amount of good for the rural economy. The ambitious thing is again the disinvestment target where they want to earn 1,75,000 crore and sell three public sector banks and one General Insurance Company and we are not talking about selling stakes here, we are talking about outright sales. But that is something that has never happened and or you know, maybe it happened back at the time when Arun Shourie was disinvestment minister and a few companies did get sold, but it hasn't happened since then, and I really don't know whether, that's going to happen.
So, they may end up earning the money tanks to be big bang LIC IPO and a few other if they are able to sell BPCL and Air India and stuff like that, but I don't think they'll be able to sort of sell all these companies that they plan to sell.
GE: So, the administrative machinery to get all this going is also maybe not something that we can is that is that what you're saying?
VK: I mean if you look at the fact that this year, the plan was to earn 2,10,000 crores through disinvestment. They say they'll end the year with 32,000 crores. The number as of 28 January was around 15,800 crore or something like that. Now, the explanation is that this is because of COVID. But if you look at COVID, from the point of view of the stock market, it was largely a problem in March and April. I mean, since May, the markets have done very, very well. I mean, you know, right now we are we're almost touching 50,000 points again, so, I don't think that, you know, it probably got stuck in the, the rigmarole of the bureaucracy and red tape ism, and which is why the government wasn't able to raise even, probably half the money that it should have.
GE: So, the alacrity that should have been was not there. Shankar, can I put the same question to you?
SA: Let me put this piece by piece. So, let's look at the expenditure numbers. And an attempt has been made to show us if health budget has sort of skyrocketed, but a part of it is actually finance commission grants. I am very happy about the allocation for pipe water. But beyond that, the health budget is net net almost the same. One must recognize that there is a need. That need has been underlined. Unlike in the past, when it wasn't that much of a priority. So, I applaud that.
Let's look at the expenditure again. And so, some of the expenditure that they are showing they may or may not be able to do it. There is a capacity issue. You would know that state governments were given money and that money is all parked in T bills and they are unable to. So, a large part of this expenditure also depends on the capacity of state governments to execute. So, expenditure may not go that much higher.
Now coming to income, I do not think that this 1,75,000 crores story may play out, I do hope they get the LIC listing. And if they have to list LIC they will obviously have to sell IDBI Bank to whoever is willing to take it because no insurance company in the world as a bank attached to its tail. I am not sure about the sale of the other two public sector banks. And you know, this requires some amount of thinking on what they want to sell.
In India, you can't sell PSBs which were earlier community banks, there will be a lot of pushback on that. The third part that I find interesting is that they have understated the revenue targets in some ways. So, there might be an upside there. But a lot of that upside depends on how they plan the vaccination program and how they accelerate the engagement in the economy. So those are questions that are there. So, it's kind of work in progress to me.
The good thing about the budget is that they didn't try any stunts. Development finance institutions, I think are a dead end, because we've tried this some five, six times and stuff like that. So, the announcements are good, they signal that they are willing to. All of these ideas have been discussed in the last 10 years. So, if you are looking for originality, you will have to knock some other door.
GE: Let me get a broader view from both of you. We went from eight quarters of a slowdown into a lockdown. So, things were not very good even before COVID. Now, where is this economy going?
SA: It signals that they will invest in human capital. But if you look at the skills development budget, or the ability of the government to get the apprenticeship program going. So one of the big problems of this government is their inability or inadequacy in their ranks to get any conversation going with different communities or segments of the economy. It's a hard task for them to be able to have a linear conversation. They are used to hierarchical conversations, top-down conversation, this is what's happening with the farm reforms bill, but let's not go there.
So, the investment in education you would think that they would bring in a plan to induct technology, because the arrival of COVID has enabled us to understand use of technology in education, and that technology could have been inducted to bridge the teacher absenteeism and various 110 other quality teaching programs and all that stuff. I don't see signs of that. I don't know whether they have a best practice rulebook or blue book to follow.
Similarly, in the health sector, I would expect them to use telemedicine and all that. So those are aspirational things that they could have mentioned and package that idea. I don't see that. They are still to really come to terms with the fact that this world is changing, algorithmic automation will retrench human interface, we are still stuck with some mean years of schooling of six and a half years and students piling out of millions piling out of the schools either can't add or can't spell words. It's, really sad. I mean I came out of a government school, so I feel saddened by all of this. So human capital, no I'm not very optimistic beyond the signaling.
GE: Vivek, how are you seeing it? What was this budget about? What did it do? Did it address the issues of the past? Is it going to take us somewhere? Or is it I really want your views rather than let me not interject?
VK: I find the idea that budgets would take us anywhere, as slightly overrated. I said this in one of the discussions that I guess what I mean, you know, all of us understand is that what has happened in the last 10 to 15 years is that, as the importance of the budget for the media has gone up, the importance of the budget for the economy has gone down.
And I look at the budget more, as, you know, a presentation of the statement of financial accounts of the government, done in as right way as possible. And along with that, I mean, you obviously make a few policy announcements. So, I don't think this budget or any budget for that matter is going to change the direction of the economy in any major way.
GE: We saw a big economic shock as have other countries. Now, that takes us back, we wanted to hit a $5 trillion GDP target, we wanted to reach somewhere near China. So, all of that now is slipping away. What does that really mean? I mean, target is good, but is it going to change our lives if we don't reach that target? Where are we lagging them?
SA: So, for about 10-12 years or so, a single problem in the Indian economy, everybody's kicked the can down the road, which is how to manage the financial sector, and how to get government out of the business of lending money, which is fraught with all kinds of rents, crony capitalism, all sort of stuff. We have not continuously sort of done some amount of lipstick on the pig on the NPA show.
The Reserve Bank of India said 13.5% could be the number with or 15 lakh crores would be the NPA around September, I don't see the budget addressing that issue. So, money makes the mare go,it runs the economy. And I know that gap sort of worries me. In terms of where we are on the $5 trillion. I mean, the $5 trillion story was an aspirational target, I don't think they expected or anybody expected us to reach 5 trillion by 24.
Now, we will be happy to reach 2019-2020 levels in 2024. And the good thing about the budget is all those ideas that have now been put out, even if sort of a quarter of them or a third of them get implemented, you will have some momentum. Having said that, private final consumption, which is private consumption is what drives the Indian economy.
Domestic consumption is what propels the growth. And for that, I think the announcements will not be enough. See, this government does one thing very well. It executes intention very well. Intention is always well executed, packaged. Highway projects for five poll bound states, you know, politics and economics nicely blended everything. But when it comes to implementation, they really struggle unless the Prime Minister puts his weight down. So, two or three things that the Prime Minister put his weight behind is Ujwala, Jan Dhan Yojna, rural electrification, they took off. But where the general John Doe of the government has to manage I think they really struggle to get anything going.
I'm happy to see the bad loan in the budget. I am happy to see DFIs in the budget, I think, frankly, it's a dead end. No direct taxes and no taxes on dollar billionaires as I had hoped. But that's a separate story.
I wanted to just touch on what Vivek said that much of the reforms that need to be done are in the domain of states, and we invest focus so much on the union budget. And even if we focus the fraction of it on the 30 state budgets, we would really get going, unfortunately, we don't.
GE: Okay, so that's a trigger for us, at least the big states, the big, larger states with the larger budgets, we should now focus on and more so as we go along with a last question for you. So, I think most of what happened or didn't happen within the budget is clear, but the stock markets reacted very well, not just the same day, but even the next day, where you would think that they, it would have typically found the fine print and then hammered it back. But so far, it seems to be holding. So, what gives?
VK: Fund managers have offered plenty of reasons for it. But in my mind, there is just one simple reason. Through the last week, the stock market fell, and from what I could gather talking to investors all around was the fact that they were afraid of a wealth tax or some sort of a COVID cess, majorly a change in the tax rate on long term capital gains are being pushed through so that the government could earn more money during the course of the next.
So, none of these things happened. So, it is for the stock market. It was like, you know, no news is good news. So, you know, they were they had already discounted for the fact that all this is going to happen, and when it did not happen, so obviously, it's going back to where it was. Now, that does not mean that these levels are justified. But then that's another story for another one to add.