Budget gives direction of economic reforms

As for banking reforms, the most significant is the creation of a bad bank or a new asset reconstruction and management institution that will take over stressed assets of the banking system

Finance Minister Nirmala Sitharaman has unveiled a series of reforms in the 2020-21 Budget proposals, taking a gamble that these will transform an economy hit hard by the Covid crisis. Banking, insurance and public sector privatisation are among the areas where major policy changes have been announced while much-needed transparency has been brought into the annual accounting exercise of the government. She has also bet big on giving a push to demand by raising capital expenditure by 34.5 per cent with the focus being on projects in the National Infrastructure Pipeline. And on health, there has been a 137 per cent rise in expenditure. But a large part of this is for buying Covid vaccines, as well as a huge allocation for providing potable drinking water throughout the country.

On the transparency issue, the decision to put all accounts into the public domain is certainly a laudable exercise, especially as there has been much criticism over fudging of data in Budgets present and past. Recently, even former RBI governor Raghuram Rajan had commented that there is a credibility issue with Indian official data. These doubts have certainly been put to rest in this Budget which has put all food subsidy data under the government expenditure heading instead of keeping much of it under another column outside the main accounts. To explain the backdrop, the subsidy meant for the Food Corporation of India (FCI) to cover buying and storing grain as well as selling it through the public distribution amounted to Rs 3.19 lakh crore in 2019-20. It was only paid Rs 75,000 crore by the exchequer and this lower amount was recorded to estimate the fiscal deficit for the year. The balance was drawn by FCI as loan from the National Small Savings Fund (NSSF) and hence did not show up in the Budget documents.

For 2020-21, however, the government discontinued this system and the subsidy of Rs 77,983 crore in the Budget estimates has now been raised to Rs 3.44 lakh crore in the revised estimates. This alone has hiked the fiscal deficit for the year by Rs two lakh crore but it has brought about much needed transparency in budgetary data.

As for banking reforms, the most significant is the creation of a bad bank or a new asset reconstruction and management institution that will take over stressed assets of the banking system. Given the growth in NPAs in recent times and the situation having worsened due to the pandemic, this is a sound solution to the problem. Much will naturally depend on implementation of this decision. Equally, there will be a close watch on execution of the other decision to set up a development finance institution. These have been set up in the past but not proved a success. The decision to provide capital infusion of Rs 20,000 crores to public sector banks is not in the category of a reform but indicates the intent to bring the system back to health.

What is definitely a reform measure is the announcement that two public sector banks and an insurance company will be privatised, as it indicates that the process of consolidation of government-owned banks has begun.

On insurance, the move to raise the ceiling of foreign direct investment from 49 to 74 per cent is a dramatic move that has been brought in without much fanfare in the Budget proposals. The history of the moves to allow FDI into the insurance sector is interesting as even the ruling party had, at one time, voted against it. No wonder then that former Finance Minister P Chidambaram says things have come full circle with the NDA government itself seeking an upward revision of this ceiling.

The moves towards privatisation, however, need to be viewed with caution in view of the failure to achieve disinvestment targets over the past few years. This time, apart from an ambitious target of Rs 1.75 lakh crore as disinvestment receipts, a road map has also been laid down for monetization of government-owned assets. This includes land, toll roads and oil and gas pipelines. It is equally significant that the Finance Minister has clearly stated that privatization of public sector companies will take place, rather than using the euphemism of disinvestment. The last time privatization was carried out in a big way was during the Vajpayee era. Subsequently, no government has had the political will to carry out this process.

The Budget proposals may centre around investment and reforms, but there has been effort to reach out to the poorest in society. Government spokespersons claim that the launch of infrastructure projects will provide employment and will thus help those at the bottom of the pyramid. This may be so, but it will take some time. Immediate support in the form of direct cash transfers could have helped those who are suffering from loss of livelihoods due to the Covid crisis right now. This is definitely a major lacuna in a pandemic era Budget.

One cannot comment on this Budget without referring to the enormous 137 per cent rise in outlay on health and well being. The increase is largely due to two factors, one the purchase of vaccines for Rs 35,000 crores and two, the very large funds allocation for provision of potable drinking water throughout the country. The actual increase in outlay for the health ministry is only about ten per cent. While this may be seen as some kind of smokescreen, the fact is that provision of potable drinking water is a key aspect of disease prevention. It is surely a powerful tool to improve the quality of public health.

The Finance Minister may not have produced a Budget unlike any other, but it surely provides a clear direction after many years towards deepening economic reforms. It now has to be seen whether it achieves the goal of pushing growth to 11.5 per cent in the next fiscal while the country is still in the shadow of the Covid crisis.