The article takes broad overview of the Budget and highlight the recovery led by the goverment spending.

Faster and sharper recovery

• The economy has been recovering sharply and faster in the last two quarters than suggested by official growth numbers.
• Official growth number remain based on antiquated year-on-year comparisons.
• Comparisons from a year ago have a serious problem in that they depend on what happened four quarters earlier and tell us very little about growth momentum.
• J.P. Morgan estimates suggest that, on a quarterly basis, India’s GDP plunged 25 per cent in the second quarter of 2020 and grew 21.5 per cent in the third quarter of the same fiscal year.
•  This is a narrative markedly different from that portrayed by the official numbers.

What is the basis of optimis

• The economy is likely to have grown another 10.5 per cent in the fourth and is expected to deliver a growth rate of negative 6.5 per cent for the full fiscal year and then rise by 13.5 per cent in FY 2022.
• The basis of this optimism is two-fold.
• First, by accident or design, India has managed to break the link between infection and mobility.
• The second is the recent shift in the government’s fiscal stance.
• After delaying for nearly six months, the government began to speed up spending in September.

Government spending to boost economy

• With the economy recovering and the equity market surging, taxes and privatisation would reasonably be expected to rise.
• The revenue increase could be used to reduce the deficit while keeping spending broadly at its current share of the Gross Domestic Product (GDP).
• This would allow spending to grow 17-18 per cent, in line with the nominal GDP.
• The choice really boiled down to where to spend.

Higher fiscal deficit

• For this year, the Budget pegged the deficit at 9.5 per cent of GDP, much higher than market estimates of around 7 per cent and a 5 per cent-point rise over the previous year.
• Instead of funding food procurement through off-balance-sheet borrowing by the Food Corporation of India (FCI), as has been the case in the last few years, this year’s Budget has rightly brought some of that spending back on its accounts.
• Excluding subsidies and interest payments, the increase in the deficit is just 2 percentage points of GDP.

Continues lack of income support

• In the details, while there is a welcome emphasis on public health, infrastructure projects, and on privatisation, the glaring omission is the continued lack of income support.
• This lack of income support is important.
• Underlying the strong headline recovery in growth, imbalances in the economy have widened significantly.
• The scarring in the labour market is extensive and the likely damage to household and SME balance sheets substantial.
• While a debt moratorium and other regulatory forbearance have concealed the extent of the damage, these measures simply postpone the eventual reckoning.
• A key risk is that not only is medium-term growth impaired because of the scarring, but also that banks turn risk-averse and do not extend credit exactly when the recovery is expected to gather strength once mobility fully normalises.

Consider the question “While the Budget for 2021-21 rightly health, infrastructure and privatisation, the lack of income support could threaten the prospects of recovery. Comment.”

Conclusion

While the Budget is constructive and has helped to allay fears of excessive fiscal tightening, it did not go far enough to mitigate the tail risk that the current economic recovery does not turn into a “dead cat bounce”.

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