From UPSC perspective, the following things are important :
Prelims level : Development Finance Institution
Mains level : Paper 3- Crucial misses in the Budget 2021-22
The article highlights the key aspects of the budget and also mention the failure to address the challenge of employment and rising inequality.
Significance of the Budget
- At its simplest, is the government’s tentative income and expenditure statement.
- At its broadest, the Budget is a pious statement of the government’s policy and ideological intentions.
- It is also the government’s statement of how it seeks to tackle the immediate political (electoral) and economic challenges.
Stepping up public investment and challenge of financing
- The present Budget’s focus on stepping up public investment by 34.5% in the coming fiscal year (compared to the current year) is a welcome sign.
- The government will borrow an additional ₹80,000 crore for the purpose in the next two months.
- Realisation of these investments would crucially depend on tax revenue realisations, disinvestment proceeds, sale of rail and road assets and the government’s ability to raise resources from the market, without raising interest rates for the private sector.
- There is no mention of the government’s recourse to debt monetisation.
- While the investment intentions are evident, its financing efforts seem to have too many loose ends.
Development Finance Institution
- To deal with the poor industrial and infrastructure investment during the last decade the Budget proposed setting up of Development Finance Institution.
- One of the reason for poor investment was a lack of long-term credit for infrastructure,which yields low rates of return spread over a long period of time.
- Commercial banks, whose deposits are for short to medium term, find it difficult to lend for long term (more than five years) for the fear of maturity mismatch.
- Moreover, as banks were laden with rising non-performing assets on account of poor corporate sector performance during the last decade.
- Also, most successful industrialising economies have relied on DFIs for providing long-term credit.
Financing challenge DFI could face
- Weakness of DFI lies in securing stable long-term, low cost sources of finance.
- The proposed DFI will be financed by foreign portfolio investments (FPI), which is a cause for concern.
- By definition, FPI represents short term inflows with exchange rate risks, while infrastructure investment is for long term whose revenues will be mostly in rupees.
- Such an investment will inevitably lead to currency and maturity miss-match, raising cost of capital.
- Hence, there is a need to consider alternative long-term sources, preferably from domestic sources, or international development agencies.
- A substantial annual fixed investment in improving urban sanitation, drinking water and sewage facilities, it is indeed a welcome step.
- A lessons from rural Swachh Bharat Abhiyan is that complementary facilities need to be constructed in a coordinated manner to maximise the effectiveness of such investments.
No effort to address rising inequality
- There is no targeted employment programme to alleviate the immediate crisis is a matter of concern.
- There is no mention of the stupendous rise in economic inequality during just the last year.
- While the poor lost their jobs and livelihoods in 2020, corporate India’s profits increased.
- The Budget could have consider a special tax on the super-rich — as many countries are now mooting.
Consider the question “What necessited the Development Finance Institution? Examine the challenge it would face in its functionig?”
In summary, if the capital expenditure plan outlined in the Budget speech is credible, and implemented with assured financial backing, it could revive the investment cycle. The proposed development bank for term lending for infrastructure is welcome, provided its sources of finance are cheap, long term and mostly domestic. Investments in urban public health infrastructure — sanitation, water supply and sewage — are in the right direction if implemented in a coordinated manner.