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A Budget for Pandemic Times
The budget for 2021–22 is important for three reasons. First, it provides a reality check on the government’s attempt to keep up public spending in the wake of severe contraction in revenues and expansion in expenditures needed to save lives and livelihoods. Second, it shows the large increases in deficits and debt in the already prevailing stressed fiscal environment. Third, as the economy was already slowing down even before the pandemic due to structural factors, it attempts to provide reform signals to reclaim the earlier growth trajectory. While it has tried to prioritise growth, there is considerable risk from burgeoning deficits and the possible impact in price stability from large liquidity infusion to facilitate government borrowing at low cost that is likely to occur. The reform proposals are important, but the test lies in how effectively they are implemented.
The most severe lockdown announced in the last week of March 2020 to contain the COVID-19 pandemic caused devastation in economic activity in the first quarter of 2020–21. The progressive relaxation of restrictions was the biggest stimulus to place the economy on the revival phase. While the Reserve Bank of India (RBI) undertook the task of heavy lifting by reducing the interest rates, providing easy liquidity in the economy, declaring moratorium on loan repayments, and restructuring loans on the stressed sectors as recommended by the Kamath Committee, public spending fiscal stimulus by the government was limited for want of adequate fiscal space. In this scenario, there were keen expectations and anxieties from the union budget as to the macroeconomic stance it would take to aid the recovery process in a resource-constrained environment and the reform signals it would emit to take the economy to a higher growth trajectory. The economy has shrunk by 15.7% in the first half of the year, and sectors with social distancing requirements continue to be under restrictions and some states are seeing an upsurge in new cases. The bank credit to commercial sector continues to be subdued and private investment continues to be low even after the phased relaxation of the restrictions.
To be sure, the Indian economy was slowing down even before the pandemic struck. The gross domestic product (GDP) growth has steadily decelerated from 8.1% in the last quarter of 2017–18 to 3.1% in the last quarter of 2019–20. The aggregate investment as measured by gross capital formation (GCF) as a ratio of GDP (current prices) showed a steady decline from 39% in 2011–12 to 32.2% in 2018–19. The private corporate investment as a ratio of GDP had declined from 13.5% in 2015–16 to 11.9% in 2018–19. Lending by the banks to the commercial sectors had remained muted. The Financial Stability Report of the RBI had estimated that the gross non-performing assets (GNPA) of the scheduled commercial banks would increase from 7.5% in September 2020 to 13.5% in September 2021 under the baseline scenario and to 14.8% under the severely stressed scenario. For the public sector banks (PSBs), the GNPA estimates are alarming, deteriorating from 9.7% in September 2020 to 16.2% in September 2021 under the baseline scenario and to 17.6% under the severely stressed scenario. The elevated levels of fiscal deficit and debt despite the rule-based fiscal policy did not allow the government the luxury of providing a large fiscal stimulus to combat the crisis caused by the pandemic and much of the heavy lifting had to be done by the RBI in terms of lowering the interest rate, ensuring liquidity partly to enable the government to borrow at low cost and through regulatory forbearance such as moratorium on repayments and restructuring of loans. In this environment, there were a lot of expectations from the budget in terms of its macroeconomic stance and structural reform signals.
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