Why India’s Budget 2021 will be a truly transformative affair
With the right priorities and fund allocations, widely expected pro-growth measures will boost post-Covid recovery and make India the fastest growing economy once again.
The first Indian budget after the pandemic on February 1 will be a fully paperless affair – and businesses and investors across industry verticals are expectedly looking forward to some highly anticipated announcements and bold reforms in what is pegged to be a transformative policy action for India.
The Indian budget has always been the marquee event of the financial calendar – but emerging out of the pandemic gloom, this year the expectations are high and hopes even higher. It is expected that the Budget papers, including the Union Budget and Economic Survey, will not be printed, and the government will instead provide soft copies. From the start-up ecosystem to oil traders to agri-economists to tax planners, everyone is eagerly waiting for the annual budget to be presented by Indian Finance Minister Nirmala Sitharaman.
That eager wait has been further boosted by the assessment that with rising demand for goods and services and revival of key economic sectors amid the declining rates of Covid-19 cases, India’s GDP growth rate will witness a V-shaped recovery with a strong 9.72 per cent growth in 2021.
Fastest growing post-pandemic economy
“India’s economy will be the fastest growing economy with 9.72 per cent growth rate compared to other major economies such as China (8.65 per cent ), France (6.23 per cent ), the UK (5.46 per cent ) and the US (3.96 per cent ) in 2021. The easing of restrictions along with huge fiscal stimulus from the government has resulted in marginally better performance of PMI- manufacturing and services since August 2020,” said Gargi Rao, Economic Research Analyst at GlobalData.
Indeed, from mid-September 2020, Covid cases in India exhibited a declining trend with a recovery rate of 96.5 per cent and fatality rate of just 1.4 per cent of the total cases. The country has already rolled out the world’s largest vaccination drive from 16 January, which is expected to revive major sectors such as transportation, logistics, hospitality, healthcare and entertainment services.
With a year of major economic turmoil and disruption behind it, the signal is thus clear for the Indian growth story to get back on track and the Indian economy to get moving forward in the new normal. Against this backdrop, start-ups, healthcare, farming/agri-tech and a plethora of other sectors have come in for high expectations from the upcoming budget.
“This year’s Union Budget is expected to be truly reformative given the unpredictable circumstances we are presently in,” said Rohit Kapoor, CEO of OYO – India & South Asia. “As the entire country prepares for the upcoming budget, a focus on growth-oriented measures, economic reforms and inclusive growth will be critical to bring the COVID-battered economy back on track,” he told Financial Express.
The taxation sector in India – for instance – is still complicated and early stage funding/seed funding for start-ups continues to be challenging in the first five years. Stronger government support and easing of norms in this area will be highly beneficial for the Make in India initiative alongside the Vocal for Local campaigns – which have received a major boost since their launch by Indian Prime Minister Narendra Modi.
As Indian and global supply chains move away from China, foreign investment as well as innovations by Indian start-ups can rightly make the country the next economic powerhouse and propel the economy faster towards the ambitious goal of becoming a $5-trillion behemoth as envisioned by Prime Minister Modi. This is a sector which will thus look forward to any signs of support for its journey ahead in the annual budget.
Similarly, a stimulus for increasing healthcare expenditure is critical at this juncture – with India ranking among the countries with the lowest public health expenditure in terms of GDP percentage. Any new regulations that support that will be widely cheered and move India towards affordable access to quality healthcare that will complement the stellar work done in the past year to develop indigenous vaccines against the coronavirus and public health strategies to contain the pandemic.
Demands of the agriculture sector
The agriculture industry – freshly buoyed by the three landmark farm laws – has a similar demand.
“Increased funding on research and development should be a priority in this budget. Given India’s significant dependence on imports of major commodities (such as vegetable oils and pulses), enhancing the domestic production of these commodities is important and additional funds might be allocated for this purpose,” said Deloitte in a policy outlook paper on the Indian budget 2021-22.
“It is important to note that livestock farming is one of the key pillars for augmenting farmers’ income through non-farm related activities. While the sector has immense potential, one of the big impediments for development is the prevalence of various diseases that affect mortality, productivity, and overall production. Supply of vaccines is not adequate to address the increasing demand. Funding for developing vaccines and creating necessary infrastructure would be required in this budget,” it noted.
According to Deloitte, the outlay for the agriculture sector, usually pegged at 5 per cent of the total budget, increased significantly in FY 2020-21 due to the higher allocation towards the PM-KISAN income support scheme for farmers. Thus, the allocations widely benefitted a large section of the farming community during the economic turmoil of the pandemic.
But while around 94 per cent of the total allocation was towards the Department of Agriculture, Cooperation and Farmers’ Welfare, the remaining was for the Department of Agricultural Research and Education. The allocation towards promoting R&D activities is therefore significantly low compared with global standards and comes at a time when India is actively promoting its prowess in agri-tech and sustainable farming against the global backdrop of food security and robust agri-supply chains.
The allocation thus needs to be raised substantially to address the challenges in the agriculture landscape and benefit stakeholders, with measures such as:
• Interest subsidy on agriculture credit for long-term loans to help farmers with investments on equipment, irrigation, or infrastructure creation related to farming.
• Crop insurance to help farmers mitigate the challenges posed by the frequent climatic changes and unpredictable weather
• Irrigation schemes to help address the issues related to availability of water and incentivise adoption of drip irrigation
• Introduction of a new scheme on vertical farming, given the scarcity of land, with support in the form of incentives on investments such as new equipment, systems, and allied infrastructure.
Priorities for infrastructure and manufacturing sectors
The other major areas of the economy that are likely to benefit from the budget include infrastructure and manufacturing – two sectors which a host of investors would be watching keenly.
In the previous budget, the government had launched the National Infrastructure Pipeline (NIP), envisaging the completion of 7,300 projects in the 2020-25 period. However, raising nearly $270 billion every year for these projects will be enormously challenging. That’s the reason why economists expect the announcement of a development finance institution (DFI) being set up to fund infrastructure projects in the budget. Investing in sectors such as housing, construction and infrastructure will have high multiplier effects, with the construction industry also a major employment generator.
The government should also use the positive post-pandemic sentiment to push for bigger reforms in manufacturing. “There is an opportunity to become a big player in the global supply chain,” said Nilesh Shah, MD of Kotak Mahindra Asset Management. “All our competitors are better in terms of infrastructure and decision-making, but they don’t have a domestic market like ours,” he told the Economic Times. The production-linked incentive (PLI) scheme announced under the Atmanirbhar Bharat Abhiyan is a game-changer and has given companies incentives on incremental sales from products manufactured in domestic units, he said, adding: “If the scheme is executed well, it will add 1.2-1.5 per cent to the GDP.”
Fiscal deficit limits government action
On the fiscal policy side, the circumstances defining budget 2021-22 are truly exceptional and the Black Swan events of 2020 will surely leave their footprint on the possibilities of 2021. The Covid-19 lockdown in the world’s largest democracy last year was an absolute healthcare necessity but an economic tsunami, comparable to the global financial crisis in 2008 sparked off by the collapse of Lehman Brothers. “No other budget compares as closely to the upcoming one as the one that followed the Lehman Brothers crisis,” said DK Joshi, chief economist at Crisil.
Finance Minister Sitharaman’s 2021 budget comes against the background of a recession, with growth in two consecutive quarters in the red and the economy set to post negative growth for fiscal 2020 as a whole, at an estimated -7.7 per cent.
While that does not look like a nice number, it could have been far worse had the government not rolled out the ambitious Atmanirbhar Bharat Abhiyan, a $265 billion stimulus that amounted to nearly 10 per cent of India’s GDP. While more stimulus measures are expected from Sitharaman’s budget this year, it is important to remember that she will have to grapple with a ballooning fiscal deficit. The unexpected costs of the pandemic will result in the deficit overshooting the targeted 3.5 per cent of the GDP set for this year by quite some margin, making high spending in the coming budget even more difficult.
Atmanirbhar Bharat to the rescue
Expectations from the budget therefore need to take those economic realities in consideration.
According to GlobalData, India’s GDP growth witnessed the worst downfall of –23.9 per cent (YOY) in Q2 2020, which is forecasted to ease to –1.2 per cent (YOY) in Q4 2020 and a growth of 0.53 per cent (YOY) in Q1 2021 due to government’s focus to revive the domestic demand during festive season along with fiscal push given to agriculture and allied sectors under the Atmanirbhar Bharat Scheme.
“The Purchasing Managers’ Index (PMI) for manufacturing and services, which declined to 26.1 and 5, respectively, in April 2020 amid lockdown restrictions, started improving since then and stood at 56.4 and 52.3, respectively, in December 2020,” said Rao of GlobalData. “Indian service sector continued to recover from lockdown restrictions as liquidity constraints were eased and job restoration was on the rise during July to October 2020. Demand revival during the festive season also resulted in an uptick in the manufacturing PMI over the last couple of months,” she said.
The green shoots of hope have extended to other sectors as well – India’s Index of Industrial Production (IIP), which contracted from March to August 2020, exhibited growth from September 2020 onwards. Indian industrial sector is all set to witness growth in Q4 2020 and Q1 2021, where capital goods and construction goods output will rise. The consumption of consumer durables and non-durables has gone up during the October to December period due to a buoyant festive season. The states have equally performed well in increasing domestic demand thereby increasing GST collections, which is a major catalyst for reviving economic growth numbers in H1 2021.
With the underlying fundamentals remaining strong, the right incentives and policies in Budget 2021-22 will thus push India towards a self-reliant and sustainable growth that becomes a magnet for investment.
“India’s business and other key macroeconomic indicators in short and medium-term are set to witness V-shaped recovery. The upcoming budget 2021 may further boost healthcare value chains, which is likely to improve services and pharma sectors along with infrastructure, which will help in the revival of economic activities. Moreover, the revival of global demand and export promotion strategies by the government is expected to put India on a steady growth path compared to other major economies in 2021,” said Rao.