Will Modi government's FY22 Union Budget fuel GDP growth?

Though lacks in content, Nirmala Sitharaman's third budgetary exercise has a strong intent

When Finance Minister Nirmala Sitharaman stepped out to present the Union Budget 2021-22, wearing a red-and-white Pochampally ikkat saree and holding a tablet draped in red, she showed her feminine side. Her softer side ended there as Sitharaman, the daughter-in-law of Telugus, appeared more confident this time and presented a starkly different Budget that fueled an unprecedented stock market rally.

Frankly speaking, stock markets don't reflect the true picture of an economy. So, there is no point in rejoicing over the massive bull run in India's stock markets in the aftermath of the Budget. But what is the reason for the euphoria in the stock markets and positive vibes in the corporate world? Is the latest Budget, the third such exercise by the current incumbent in the North Block, the best one ever?

In the run-up to the Budget Day, Finance Minister herself claimed she would present a Budget that India had not seen in 100 years, and that would turn the country into an engine of global growth in the post-Covid world. Did this Budget meet the high parameters she had set?

It's too early to say whether the latest budgetary exercise of the Modi government will fuel growth on projected lines as it obviously lacks content and has nothing much to offer when it comes to actual numbers. However, it has strong intent that did the trick. The Finance Minister announced that the fiscal deficit would reach a whopping 9.5 per cent of GDP in the current fiscal. This transparency on the fiscal deficit front sent a strong signal that the Modi government wouldn't mind stretching the fiscal deficit limits to support the economy by spending more. The government has also announced a medium-term fiscal consolidation path under which it will bring down the fiscal deficit to 6.8 per cent in the next financial year and to 4.5 per cent by 2025-26 fiscal.

Of course, the likely higher fiscal deficit in FY21 may attract the ire of global rating agencies which may push India's sovereign rating to junk status. If that happens, overseas borrowings will become costlier and India's credentials as an investment destination will take a beating. But the central government seemed to have this aspect in mind. This year's Economic Survey tabled in the Parliament two days before the Budget, already took on the global rating agencies by saying they showed bias against India. That's a clever strategy. Let's see how it will play out and whether global rating agencies will maintain a restraint as the central government has no option expect spending more to tackle the economic crisis triggered by the pandemic.

Another positive take away from the Budget is that the government has increased capital expenditure (Capex) and enhanced spend on the key healthcare sector. As per Budget estimates, the Capex has been increased by over 34.5 per cent to Rs 5.5 lakh crore from Rs 4.12 lakh crore a year ago. Enhancing capital expenditure by such a high percentage at a time when the fiscal deficit reached 9.5 per cent is an audacious move that has made the right vibes. The Finance Minister also increased budgetary allocation for the healthcare sector by 137 per cent. With this, the government seems to be keen on strengthening the healthcare sector, which is the need of the hour. Furthermore, Sitharaman did not impose any additional taxes even though the Covid crisis took a heavy toll on the exchequer. This also sent ample positive signals.

However, it's a fact that there is not much on the welfare front. Perhaps, the Modi government is under the impression that higher capital expenditure and renewed focus on the infrastructure will generate ample work opportunities for people.

Nevertheless, Sitharaman's latest Budget exercise has not impressed many people. But India is home to more than a billion people. As Indians are known for their argumentative nature, it is a Herculean task to satisfy all of them. More so, when it comes to economics. So, coming across diverse opinions on this budgetary exercise is not new.

But like everyone else around the world, we have gone through a harrowing experience in 2020. Covid-19 is a once-in-a-century health crisis that has crippled every economic activity. Results are there for all to see. India's economy contracted by a staggering 23.9 per cent in the first quarter. Of course, total lockdown played spoilsport during April-June 2020, the first three months of the financial year 2020-21.However, the economy made a strong rebound in the second quarter. As the result, the economic contraction narrowed down to 7.5 per cent. It is to be seen whether this fast-paced recovery will continue, and GDP growth will turn positive in this fiscal itself.

This year's Budget also attracted strong political criticism with Opposition parties alleging that the FM showed leniency towards poll-bound States. The fact of the matter is that politicians see political dividends in every action they initiate and every decision they make. The Finance Minister also did the same when she announced more sops and made more allocations for poll-bound States of West Bengal, Tamil Nadu, Assam, and Kerala. Earlier Union Governments including those led or steered by Congress also did the same. There is nothing wrong with that so long as such decisions don't harm India's economic interests in their totality. Every State will have elections once in every five years and each State will get additional benefits in one Budget or the other.

Anyway, the bottom line is simple. BJP will win the 2024 General Elections if the Modi government does well. The key parameter on which this government will be judged is the way it's handling the Covid crisis. I don't think those in the Modi government are foolish enough to throw the baby out with the bathwater. That's as simple as that. So, let's give the Modi government the benefit of the doubt on this budgetary exercise as India is battling once-in-a-century pandemic and its associated economic chaos. However, the intent in the Budget should turn into a meaningful content if India has to cure the deep economic wounds caused by the Covid and put GDP on a higher growth trajectory.