Budget 2021: Key Focus Areas To Sustain The Economic Recovery

By: Tavaga Research

In less than a month from now, on 1st February 2021, finance minister Nirmala Sitharaman will be presenting Budget 2021-22. It is that time of the year when India Inc, policy experts, market participants, and all the other stakeholders interact extensively with the government, hoping that their recommendations find favor in the keenly tracked event, the Union Budget.

India Inc CEOs, with a tumultuous year behind them, are keenly tracking the latest developments on the 2021 Budget, as it holds the key to help kick-start the next wave of the investment cycle. Backed by various actions taken by the central bank and the government including the debt moratorium scheme, the executives expect the economy to get back on the growth path supported by the positive development on the vaccine front. 

The finance minister has already promised a never-before-seen budget as the government looks to steer the pandemic-battered economy and push growth. To revive growth, economic support has to be extended to areas that are the worst hit due to COVID-19, while ensuring that those areas which are going to be the centers for newer demand continue to receive the necessary resources.

Although there are several green shoots visible in the economy still, as the RBI pointed out in its bi-monthly monetary policy last month, the recovery is not broad-based and the policymakers have to be mindful of that. Against this backdrop, the finance minister has an uphill task to further boost the economy towards the growth levels witnessed prior to the pandemic. We list below some of the areas that should be emphasized in the Budget. 

Infrastructure Development warrants special focus from the government

With the pandemic having disrupted almost every industry, there are no doubts in anyone’s mind that the industry at large and the economy in general need handholding. In ascertaining that any recovery gains momentum, the upcoming Union Budget must front-load infrastructure investments. This is particularly needed because the states contribute approximately 40 percent of the total investments in infrastructure. 

But the havoc that the pandemic-related disruption has caused on the finances of the states is enormous. They have record-high deficits and the liquidity situation is only exacerbating the pain. The central government must, therefore, shoulder most of the burden of raising funds to drive infrastructure investments and projects. 

Given the Modi government’s focus on Atmanirbhar Bharat, infrastructure development can be vital in attaining those goals. Any delay will impact the possibility of a faster recovery. 

Redefining the healthcare sector

The healthcare system across the world witnesses unprecedented challenges in CY20 and more so in India. With a population of around 1.35 billion, the pandemic posed an exceptionally dangerous threat to India. 

The year gone by has changed the way we look at healthcare. The sector has undergone a paradigm shift over the past nine months and the upcoming budget has the potential to transform the sector as we know it. 

At the individual level, there has been increased interest in healthy living and preventive medicine & care. The sharp rise in the number of individuals getting the flu vaccination is a vindication of the same. For the provider of healthcare, coronavirus forced them to redefine their safety protocols. 

The restrictions imposed by the lockdown to contain the virus spurred the digital transformation of the industry. Digital, therefore, is now an essential aspect of the delivery of healthcare, with healthcare institutions racing to make their digital platforms seamless and user-friendly. This digitalization wave will be fueled by artificial intelligence (AI), telemedicine, machine learning, etc. 

However, there are several chinks in the armor, that need to be ironed out.  The onslaught of COVID-19 has duly woken the health authorities to the urgent need to significantly raise the allocation towards healthcare as a percent of GDP. The Budget Estimates on healthcare for FY20 were Rs 67,484 crore compared to the Revised Estimates of Rs 63,830 for FY19. 

There has never been a greater spotlight on the healthcare system in India. The pandemic offers a chance to transform an essential sector, given the increasing frequency of fatal diseases and the uncertainty relating to the impacts of climate change. 

Transforming the Agriculture Sector

With the ongoing protests to scrap the transformational farm laws, the government of India is expected to continue its focus on the progress of the agricultural economy. 

India has successfully turned itself from an import-dependent to self-sufficiency and then on to a net food exporting country, through the sheer hard work of the farmworkers and sustained policy support from various governments over the past couple of decades. 

However, there is a cause for concern that the income level of the farmers has not increased adequately. While farmers from Punjab and adjoining areas are hoping to get the center to guarantee MSP-based procurement on all crops, the system needs to be overhauled drastically if the government intends to fix the farm sector, which has seen income becoming stagnant. 

The system currently, concentrated in a few states like Punjab, has distorted cropping patterns and destroyed the nutritions in the soil; it costs upwards of Rs 2.5 lakh crore per year, and thanks to this the Food Corporation of India (FCI) is carrying food stocks of around Rs 150,000 crore. In addition, another Rs 80,000 – Rs 100,000 crore is spent annually on electricity and fertilizer subsidies.

Given the growth-induced impact that investments have, this money could easily be spent on creating cold storages, market yards, and irrigation facilities across the country, in providing direct transfer to poor farmers, in boosting procurement in eastern India where income levels are especially low, etc. The low level of government investment in agriculture directly results from unproductive spending on subsidies. The government can utilize the crises induced by the pandemic to rectify this wasteful spending. 

Manufacturing as a driver of economic growth

The flagship Atmanirbhar Bharat initiative and the Make in India campaign of the Modi government has at its forefront the manufacturing sector. Despite that manufacturing constantly hits roadblocks in the India story. While the government has been taking measures to overcome the challenges it needs to provide greater incentives to the manufacturing sector in the upcoming Budget. 

Even as India climbs the Ease of Doing Business ranking, the manufacturing activity has not matched that pace. The sector contributed about 17.4 percent of India’s GDP in FY20, slightly more than 15.3 percent it contributed in 2000, according to a report by McKinsey. By comparison, the sector’s contribution more than doubled in Vietnam.

According to an analysis, out of the top 1000 manufacturers in India, nearly 700 produced returns that were below their cost of capital in 2018. Several factors tend to contribute to the woes of Indian manufacturers. These include, poor logistics causing delays and raising investors costs, high power prices, and credit costs inflate the operating expenses are some of the main reasons. 

Although the government has introduced various schemes such as the Production Linked Incentives (PLI), it could introduce some new measures to complement these, to realize the goals it has set for itself for the manufacturing sector. 

The chart above shows the PMI Index. It is a gauge of the manufacturing sector’s activity in India. The PMI Index was above the critical 50 threshold for the fifth straight month in December representing an expansion. A reading of above 50 indicates expansion in the manufacturing sector. 

Renewing the focus on the education sector

The education sector, during the previous year, witnessed two key developments, National Education Policy 2020 (NEP) and the pandemic. Both developments underscore the priority attention that this sector demands from the Union Government, especially the K-12 education. The finance minister should look to increase the budgetary allocation towards the Education Sector. 

K-12 education includes the primary and secondary phases of school life, covering education from Kindergarten to standard XII. The budgetary allocation for the sector for FY21 was mere Rs 99,312 crore out of the total Union Budget of Rs 30,42,230 crore for the same period. 

Studies from the United States show that the return on investments in early childhood care and education programs are very positive. It is estimated that every dollar spent on early childhood education generates a benefit amounting to $4 (Source: UNESCO Publication Early Childhood Care and Education). 

Conclusion

For the finance minister to ensure that the economic recovery sustains and becomes more broad-based, it is imperative that there is sufficient discretionary money in the hands of the consumers, while ensuring that their confidence remains high. For this, the government should ensure that the COVID-19 doesn’t exacerbate and make significant improvements to the healthcare system, by increasing the spending on the healthcare sector.  

More importantly, the government should, without worrying about the fiscal deficit, continue to support stressed sectors as long as necessary, while ensuring that it doesn’t lose sight of the long-term implications of their actions. The RBI, for its part, should maintain the status quo for a foreseeable future and should continue with its accommodative stance.

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