It is for time to tell whether the suggested reforms will lead India to play a prominent role in the post-pandemic economic recovery.
This day last year, while Finance Minister, Nirmala Sitharaman, was delivering her Budget speech outlining three major plans for the Indian economy — Aspirational India, Economic Development for All, and a Caring Society — who would have thought that a year later the Indian Budget will be centred around countering a virus that has taken a massive toll on the entire world economy and society? ORF undertook a project to unearth a set of development priorities for the 2021 Budget that could help jump-start the country’s post-pandemic economic revival, with precise actionable measures for promoting growth in a fair, equitable, and timely manner. On the basis of this project, a team of ORF analysts made a presentation before the Finance Minister (FM) on 11 January 2021, outlining specific recommendations for this year’s budget priorities on a variety of domains such as consumption demand, trade and competitiveness, green transitions, and reforms in the existing tax structures.
The Budget this year had to be one “like never before,” as was also promised by the Finance Minister a few days back. The improvement in the COVID-19 situation in India in terms of the declining deaths and low infection rate in the past few days have indeed set the stage for the economic recovery process that the country needs after India’s massive contraction in GDP of 23.9 percent in the first quarter and a contraction of 7.5 percent in the second quarter of FY 2020-21. During the pandemic, the three Atmanirbhar Bharat packages and the RBI measures are jointly estimated to be valued at around INR 27.1 trillion, which is close to a third of India’s GDP. Despite such measures in place, expectations were soaring for the Government to aid sectors that needed an urgent push to bounce back, such as tourism, hospitality, etc., while at the same time farsightedness was required to increase the competitiveness in industries such as pharmaceuticals and precision tools, among others.
The Union Budget 2021-22 was founded on the 6 pillars of — 1) Health and Well-being; 2) Physical and Financial Capital; 3) Inclusive Development for Aspirational India; 4) Reinvigorating Human Capital; 5) Innovation and R&D; and 6) Minimum Government and Maximum Governance. It is no surprise that health infrastructure comes as a priority for the Government during the pandemic year, as the FM announces an outlay of INR 641.8 billion for the Pradhan Mantri Atmanirbhar Swasth Bharat Yojana. The Government of India has also planned to provide INR 350 billion for the COVID-19 vaccine in FY 2021-22, and is committed to sanction more funds if required.
Interestingly, this year’s Budget strongly acknowledges the importance of a clean environment and clean water, and the sanitation targets echoed by the UN Sustainable Development Goal 6 — as a prerequisite to achieving universal health. Taking that into consideration, the Jal Jeevan Mission (Urban) will be implemented over the next five years with an estimated outlay of more than INR 2.5 trillion. In fact, a recent ORF study found that the worst-performing states in SDG 6 (Clean Water and Sanitation) are the ones that are not facing shortages in water supply, which called for a paradigm shift that will focus policymaking on demand management. Additionally, there have been a number of plans that aim to tackle issues ranging from waste management to air pollution in the Union Budget 2021.
The FM’s announcement of 675 kilometers of highway work in West Bengal at a cost of approximately INR 250 billion comes as a strategic move ahead of the much-anticipated West Bengal State Legislative Assembly Elections next month. There were also strong suggestions to break the monopoly in the power sector where a framework is supposed to be put in place to help consumers choose from more than one distribution company. In fact, this move is also quite politically relevant for West Bengal where the Calcutta Electric Supply Corporation (CESC) is often accused of monopolising the power distribution in Kolkata. CESC failed to provide adequate services for weeks and was charged with sending inflated bills to consumers after Cyclone Amphan. Additionally, an outlay of INR 10 billion was also announced for the welfare schemes of tea plantation workers in West Bengal and Assam.
In the domain of Aspirational India, a large focus was placed on agricultural reforms and improving farmer incomes — a crucial step in view of the ongoing farmer protests in the country on the new farm laws. For enhancing human capital, a series of reforms to advance educational and skilling infrastructure has also been announced. To foster innovation and R&D, a boost to the research ecosystem is also on the cards. Finally, efficient governance is also considered to be a top priority this time, as the Government of India will also undertake the monumental task of conducting the country’s first ever digital census this year.
Like other world economies, the pandemic has had a detrimental impact on the Indian economy as well. Characterised by a weak revenue flow coupled with the compulsory provision of essential relief to the vulnerable sections of the population — the fiscal deficit for FY 2020-21 is pegged to be at 9.5 percent of GDP — which is quite understandable given the unprecedented nature of the crises faced in 2020. What is also quite laudable is the fact that the Government aims to gradually bring down the fiscal deficit to below 4.5 percent of GDP by 2025-26.
Although the Government had announced multiple midsize packages during the pandemic to revive domestic demand, the issue of consumption demand has been a major problem in India even prior to the pandemic. Despite such issues in the background, the income tax slabs remain the same in this Budget. Although ITR filing has been exempted for senior citizens above 75 years of age with pension income, there has been no relief for the salaried classes who have a considerably high consumption propensity, which might not be beneficial in reviving India's low consumption demand.
Nevertheless, a large number of measures have been suggested for increasing the efficacy of the income tax processes in India. In terms of indirect taxes, reforms to simplify the GST have also been undertaken. For example, AI and modern technology is being increasingly used to identify indirect tax evasion and that has led to record collections in the last few months. There is no doubt that the Budget this year has been one of the most compassionate of sorts, but it wouldn’t be fitting to say that the Budget proposals were “like never before” in its entirety. It is for time to tell whether the suggested reforms will lead India to play a prominent role in the post-pandemic economic recovery and set the stage for a new world order.
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Soumya Bhowmick is an Associate Fellow at the Centre for New Economic Diplomacy at the Observer Research Foundation. His research focuses on sustainable development and ...
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