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If Executed Well, 8% Growth Is Possible

Economists, CEOs, consultants, sector specialists interpret Nirmala Sitharaman's 'Never-before' Budget
Team BT | Print Edition: February 21, 2021
If Executed Well, 8% Growth Is Possible
Illustration by Raj Verma

In one of the toughest years to present a Union Budget - when the Indian economy witnessed the sharpest GDP contraction in years due to the Coronavirus outbreak - Finance Minister Nirmala Sitharaman went all out to increase capital expenditure in infrastructure and healthcare, and unveiled plans to monetise state assets, privatise state-owned banks and insurance companies. Sitharaman had already raised expectations calling it the 'Never Before Budget' weeks before it was presented. On Budget day, the BSE Sensex responded with a gain of 2,315 points (5 per cent), its biggest rise after a Union Budget since 1999. Business Today spoke to economists, CEOs, consultants and sector specialists to gauge the mood of the country regarding Budget 2021.

Here's what Arun Kumar, Chairman & CEO, KPMG in India; Ashu Suyash, MD & CEO, CRISIL; Mohit Malhotra, CEO, Dabur India; Ranjan Pai, Chairman, Manipal Education and Medical Group; Sachchidanand Shukla, Chief Economist, Mahindra Group; Saugata Bhattacharya, Executive Vice President, Business and Economic Research and Chief Economist, Axis Bank; Seshagiri Rao, Joint MD and Group CFO, JSW Steel; Uday Shankar, President, Federation of Indian Chambers of Commerce and Industry (Ficci), and Zarin Daruwala, Cluster CEO, India and South Asia markets (Bangladesh, Sri Lanka and Nepal), Standard Chartered Bank, had to say:

Was this the 'Never-before' Budget as promised? Will it bring India back to a sustained 8 per cent-plus growth rate?

Sachchidanand Shukla: This Budget has its head and heart in the right place with focus on infrastructure, health and financial sector rejuvenation. It resisted the temptation of tinkering with direct tax rates. Moreover, it has been transparent by including some one-off balance sheet items in headline deficit numbers.

The allocations for FY21 should be seen in the context of the pandemic where the government had to resort to additional one-off kind of expenditure to save "lives." Around 800 million people were provided free food and job scheme allocation had to be raised, given the acute rise in demand in the short-term. However, with India seemingly turning the corner on Covid and eyeing faster recovery in FY22, the economy needs to pivot to a more "Rurban" and infra-led growth, while maintaining the agriculture and rural thrust.

Uday Shankar: Budget 2021 is outstanding because there was clarity and focus to kickstart economic activities after an unprecedented pandemic. It also laid a strong foundation for Atmanirbhar Bharat. The thrust on capital expenditure is the biggest takeaway. Similar thrust was given to develop physical, digital and social infrastructure across India. This will propel growth and boost faster economic recovery. It will facilitate sustained high growth in the medium-to-long term.

Ashu Suyash: The Budget was framed against a 'Never-before' backdrop of the sharpest GDP contraction in memory. It adopts an expansionary stance with tilt towards high-multiplier investment spending, rather than revenue spending. Announcements of a Development Financial Institution (DFI) and asset monetisation, if executed well, can help finance sustainable infrastructure creation. That, along with sharp focus on manufacturing, could be a springboard for higher growth in the medium-term. Achieving 8 per cent growth on a sustained basis will require continuous efforts to improve the ease and cost of doing business.

Saugata Bhattacharya: This was a very balanced Budget, given the scarce resources. It is growth-oriented, a sharp change from the earlier emphasis on fiscal prudence. The higher countercyclical spending was required, since this is not a normal economic down-cycle, but a-one-in-a-century shock.

The sharp increase in capex spends, and means to increase debt financing for projects, will increase India's productivity, and raise growth potential. The PLI scheme for 13 champion manufacturing sectors will also increase scale, and facilitate India joining global supply chains.

Arun Kumar: The Budget is a great reset, focusing on key themes critical for resuming India's growth trajectory to becoming one of the fastest-growing major economies.

First is the focus on infrastructure, by enhancing capital allocations to Rs 5.54 lakh crore, a 34.5 per cent increase over the previous year. The creation of a DFI with an allocation of Rs 20,000 crore is expected to act as a catalyst for the creation of an infrastructure portfolio of at least Rs 5 lakh crore over the next three years.

A related initiative has been the announcement of the National Monetisation Pipeline with a wide sweep from highways and power to railways, airports, warehousing, oil & gas pipelines and sports infrastructure. The proposed resolution framework for dealing with stressed assets can help unclog sectors. The Budget has been bold to recognise the need for an accommodative fiscal policy and outlines a path till FY26.

These measures, if executed well, should help bring India back to a sustained 8 per cent-plus growth rate.

Zarin Daruwala: The Budget unleashed the fiscal firepower to boost growth. The government remains committed to reviving growth, given that it intends to maintain higher spending over the next five years with the revised fiscal roadmap. The Budget sets a benchmark in quality of expenditure, by focusing on sectors with multiplier effects (roads, railways) and the credibility it carried by recognising otherwise off-budget spends.

India was cautious in spending increases at the peak of the pandemic. The expenditure push in FY22 and beyond, amid a lower infection rate, could have larger multiplier impact on growth. By focusing on quality expenditure while towing the fiscal line, it could create a base for higher growth. The success of expenditure increase depends on the government's execution skills.

The RBI's research on fiscal multipliers suggests an increase in capex by central and state governments by one rupee, increases output by Rs 3.25 and Rs 2, respectively. This could allow India to achieve the current nominal target of 14.4 per cent and set the stage for a return to previous growth rates.

Seshagiri Rao: From the infrastructure investment point of view, it is a 'Never-before' Budget. A DFI with Rs 20,000-crore capitalisation and monetisation of assets, including roads, transmission lines and land among others, are big steps. The National Hydrogen Mission is another interesting move. Privatisation of two banks and an insurance company and creation of an institution to buy debt securities are interesting steps for financing growth. The Budget will enable the availability and cost factors of production - land, labour, capital - and enhance the ease of doing business, while impacting the growth rate.

Mohit Malhotra: Yes, it was truly a 'Never-before' Budget, which focused on putting in place key levers for long-term growth. With focus on healthcare, infrastructure development, privatisation and digitisation, this Budget would go a long way in kickstarting manufacturing with a focus on Atmanirbharta. It can help bring India back on the growth track. The other big positive is the absence of any negatives.

Ranjan Pai: Given the overall pressures on government finances, the FM would have done what was considered feasible. However, it is very positive that the FM conveyed that additional allocation for healthcare would be made available if required. The focus should now move to execution.

All along the government has focused on the supply side of the economy. Has enough been done to trigger demand/ consumption?

Zarin Daruwala: The hallmark of the Budget is the focus on quality of spending - higher growth in capex versus revenue spending to support multiplier growth effects. This would support a virtuous cycle of investment-driven growth, more jobs, income growth and demand creation.

Studies have shown government spending multipliers, particularly in public investments, if executed appropriately, could outperform tax multipliers. Recent International Monetary Fund studies suggest during periods of uncertainty, the positive spillover effects of public investment are amplified, where an incremental public investment of 1 per cent of GDP can boost growth by 2.7 per cent, private investment by 10.1 per cent and employment by 1.2 per cent. These studies assume high-quality investments without increasing public and private debt burdens - if the Budget announcements are followed by strong execution the government would achieve that.

The focus on the supply side should be seen in the broad-based framework of increased infrastructure spending and state capex in addition to a focus on health and education. If executed well it would be more than capable of triggering private and offshore investment and increase demand and consumption.

Seshagiri Rao: The increased capital expenditure plan and another Rs 2 lakh-crore transfer to states will help accelerate economic activity and job creation, which will trigger consumption. There is also a plan to spend on health and education, which are supportive factors.

Arun Kumar: The focus on ramping up infrastructure is expected to provide significant employment opportunities, thereby raising consumption capabilities across the board and spurring consumer demand.

Measures such as the extension of social security benefits for those in the unorganised sector, particularly gig and platform workers, will help improve consumer spending. In sum, the pump-priming approach that has been adopted is expected to create an upsurge in consumption, arising from enlarged access to livelihoods. The Budget has also proposed a variety of investments and measures to improve rural employment opportunities and spur rural demand.

Uday Shankar: The Budget has been balanced, laying equal emphasis on immediate recovery as well as medium-term growth. The announcement on increasing capex by 34.5 per cent bodes well for job creation. Setting up seven Mega Investment Textiles Parks will generate huge employment. It will have a positive impact on demand and consumption. More steps can definitely be taken and we hope the government will step in with further interventions going forward, to trigger demand in sectors, including retail, hospitality and travel.

Ashu Suyash: The policy focus of the government had already segued to the demand side as supply-side constraints caused by the pandemic eased. The Budget continues in that vein. Total budgeted expenditure for FY22 is 14 per cent higher year-on-year and we can certainly expect that to stimulate demand. Nonetheless, the intent of the Budget seems more on generating investment demand than consumption demand. Possibly, this is what the expanded fiscal space permitted. Given the budgetary push, we have revised our FY22 GDP growth estimate to 11 per cent from 10 per cent.

Saugata Bhattacharya: The measures to further incentivise affordable housing, given the long forward and backward linkages, will create jobs and hence offer income opportunities. The measures for sectors like textiles and fisheries, will allow employment opportunities. Healthcare expansion has the potential to absorb a large labour force, with some retraining, into secondary and tertiary medical and health services.

Can this Budget encourage private investments, create new jobs? Experts fear India faces a K-shaped recovery of unequal growth - rich becoming richer and poor becoming poorer.

Seshagiri Rao: When the demand picks up, existing capacity utilisation will increase and there will be demand for new capacities. Private investments will flow in at that point of time. It will not come immediately, but will come by next year. The government has already addressed the issue of inequality, through direct benefit transfer as a part of fiscal stimulus that was already announced. The stimulus was targeted to improve SMEs and vulnerable sections in the society, One nation, one ration and steps to help migrant workers are intended in that direction.

Zarin Daruwala: Increasing allocation to the PLI scheme, which shows strong initial promise from an employment perspective and a focus on MSMEs (particularly textiles, a large employer with deep backward linkages) is a key positive for job creation. Also, to ensure that the benefit of this Budget is well distributed, particularly in light of what some fear is a K-shaped recovery, the areas of focus have been carefully selected. The more than doubled healthcare budget has rightfully focused on providing medical facilities, especially to the more vulnerable.

Most notable are the nearly 40 per cent higher allocations, compared to the previous Budget, to the Pradhan Mantri Gram Sarak Yojna, Pradhan Mantri Krishi Sichai Yojna and the Urban Rejuvenation Mission, in addition to the 9 per cent growth to the Pradhan Mantri Awas Yojna - these are expected to give a fillip to rural and urban incomes and consumption, particularly benefiting segments impacted by the pandemic.

Arun Kumar: Given that one of India's primary challenges is to absorb around 12 million people who are added to the employment cohort annually, the cardinal focus areas of the Budget - ramping-up infrastructure creation, improving agricultural and rural facilities, simplification of process barriers for industries, ambitious disinvestment plans for state-owned enterprises, extension of the public-private partnership (PPP) approach into new domains like urban public transport, creation of new economic corridors - are all measures that are expected to provide job opportunities and thus a measure of wage security to a significant part of the population.

The government has also made a new beginning in extending social security benefits to all gig and platform workers, as well as universalising the minimum wage concept for all categories of workers, apart from infusing new funds and schemes into the agriculture and rural sector.

As the Economic Survey had also indicated, the Budget has singularly focused on ramping up capex investment for GDP growth, as one of the key determinants for lifting all boats, and providing income security and livelihood for all.

The government has adopted a path to build hard infrastructure, spend on creating assets that over time will induce more 'sustainable' job opportunities, against an approach of handing out money in the hands of people. It's debatable whether the latter approach can lead to more equitable growth; the former, if executed well, will surely lead to a more sustained and inclusive growth.

Ashu Suyash: Despite capacity overhang due to low utilisation rates, private sector investment, particularly by large corporates, should be quick to pick up, especially in sectors such as cement and steel. These firms have done well and also deleveraged, so they can be expected to lead investment revival once recovery is on a firmer footing.

The PLI scheme for 13 sectors, with a total outlay of Rs 2 lakh crore, is expected to catalyse investments in these sectors. Also, given the five-year window in which the scheme must to be utilised, we expect capex to pick up from the current fiscal itself.

Till such time, though, the government will need to do the heavy lifting, and here, the Budget lives up to that demand by raising capital expenditure by 26 per cent over the current fiscal's revised estimate.

However, the sobering point is that including internal and extra-budgetary resources, which is essentially capex spend done through government entities such as the National Highways Development Authority, the increase over the revised estimate for this fiscal is a modest 5 per cent.

A sustained pick-up in public investment in areas such as construction, roads, highways and healthcare will have a multiplier effect on the economy, help create jobs, and crowd-in private investment.

Mohit Malhotra: Yes, this Budget will help in employment generation. Like I said earlier, with the increased spending on infrastructure development and healthcare, besides the focus on privatisation, the state of the economy will surely improve and spur employment generation.

The five-year fiscal deficit glide path of 4.5 per cent by 2025/26 looks ambitious. While higher deficit indicates expansionary fiscal policy going forward, chances of failing to meet the target is also very high. Your assessment?

Arun Kumar: Given the challenges brought about by the pandemic, the government chose the right and possibly the only available path, focusing on expansionary fiscal policy to spur growth, create employment and provide income security across short and medium-term. Once the country transits into steeper growth and private investments acquire greater traction, the government will have enough leeway to calibrate and better manage deficit-financing challenges.

Indeed, execution is the key. If the government can pull off asset monetisation, privatisation and divestments in a timely fashion, the probability of meeting fiscal targets is very high.

Uday Shankar: The temporary break on fiscal consolidation has been necessitated due to unforeseen circumstances and we are grateful to the finance minister for prioritising growth over fiscal considerations. We believe fiscal stimulus will propel real growth of more than 11 per cent in FY22 and help economic activity return to pre-Covid levels. We are confident that reforms and measures in the Budget will help sustain high economic growth, triggering buoyancy in tax revenues.

Zarin Daruwala: The FY22 fiscal deficit math carries increased credibility - wherein revenue has been underestimated, with acknowledgement of downside risks to expenditure projections. The finance minister could very well surprise on the positive in this regard, as FY21 and FY22 fiscal deficit could be narrower than budgeted by about 0.3-0.6 per cent.

Over the medium-term, one should consider the 4.5 per cent target for FY26 from the growth impulse for the economy. The government has shown a strong pivot towards growth, with increased spend on capex and an incremental 15 per cent allocation to nine core sectors which carry long-term growth multipliers.

The Budget created innovative modes to finance infrastructure build-outs such as a DFI, zero-coupon bonds by infrastructure debt funds and debt financing of investment trusts and real estate investment trusts.

The enabling frameworks and improvement in revenue dynamics could set the stage for achieving, if not beating the FY26 fiscal deficit target. This target itself is well above the previous target of 3 per cent for the same period.

Ashu Suyash: The fiscal glide path is a deviation from the Fiscal Responsibility and Budget Management Act due to the pandemic-wrought situation and recognises the need to balance short- and medium-term fiscal consolidation. It can be achieved if growth is sustained, for as the Economy Survey points out, "growth leads to debt sustainability in the Indian context and not vice-versa." So sustaining strong GDP growth, which will lead to revenue buoyancy, is critical for this to happen.

Saugata Bhattacharya: The glide path is quite gradual. The aggressive push on monetisation of government assets, greater tax compliance and expenditure rationalisation will open up space for higher revenue realisation and efficiency in spending.

Seshagiri Rao: The fiscal deficit is set at 6.8 per cent for FY22 against 9.5 per cent for FY21. Though it stands at Rs 15 lakh crore, net market borrowings are lower at Rs 9.57 lakh-plus crore. So it may not impact the overall yield in the bond market. The governments plan to front-load Rs 14-15 lakh crore per year in spending constituted 70 per cent of total budgeted expenditures for projects under NIP in the coming two years. It will taper down once private investment catches up. So, the fiscal deficit will come down in the medium-term.

Mohit Malhotra: Considering that this Budget came in the backdrop of the pandemic and a tough economic situation where the government had little headroom for manoeuvre, this is a progressive and growth-oriented Budget. The high fiscal deficit in understandable in this context. It is encouraging that government plans to gradually reduce this to 4.5 per cent by 2025/26.

The high level of provisioning by PSBs of stressed assets calls for cleaning up of bank books. Is setting up an asset reconstruction company (ARC)to take over stressed debt the right way?

Seshagiri Rao: They designed it in such a way that asset reconstruction companies will buy NPAs from banks and pay back through securities. It will reduce the burden of banks. The ARC will sell it to the asset management company, once the assets are matured. The final monetisation will happen when it will be sold to alternative investment funds.

Ashu Suyash: Non-performing assets (NPAs) of PSBs have been high over the past five years. The pandemic is likely to have made this worse and we could see a rise in NPAs over the next few quarters, once clarity emerges around the Supreme Court's directives on asset classification standstill.

The NPA challenge means PSBs have been spending disproportionate amount of time and management on resolution of stressed assets, leading to defocusing of credit growth. A large, well-capitalised ARC is a powerful tool for stressed assets resolution since it can take over bad loans. The ARC route has also been taken by others like China and Korea to solve NPA problems.

The things the Budget missed?

Uday Shankar: Sectors like tourism, hospitality and aviation, among the worst-affected, did not receive due focus. We look forward to some specific announcements in future. The decision to set up a DFI is a huge positive. We hope the government will consider expanding the scope of the DFI to all long-gestation projects besides infrastructure. Another area that could have been considered is the weighted deduction of 200 per cent for investments made by the private sector towards innovation and R&D.

Sachchidanand Shukla: The consumption sops are missing. The government could have given relief to the salaried and middle class by raising standard deduction or some tax relief. However, non-imposition of a Covid cess should be seen as relief. There are also no sector-specific announcements to aid recovery of stressed sectors like aviation, commercial vehicles, hotels.

Seshagiri Rao: For fiscal consolidation and economic revival, most issues are addressed. I have some apprehension on the tax buoyancy side. The nominal GDP growth has been presumed at 14.4 per cent in 2021/22, but tax buoyancy has been estimated at 22 per cent. It is not clear how tax buoyancy of this magnitude will be achieved when taxes are left untouched.

Arun Kumar: Two things could have helped. First, huge amounts are stuck in the infrastructure sector with developers either in claims, dues, or regulatory assets. Getting this money back into circulation faster would have helped. Second, some tax deduction in the lower tax bracket by increasing standard deductions may have helped in enhancing disposable income. However, the more relevant aspect to focus on would be around measures to ensure budgetary objectives are translated into well-implemented programmes that provide benefits in terms of better livelihood.

Ashu Suyash: One, would be support for funding access by NBFCs. An extension of the partial credit guarantee scheme, more of targeted long-term repo operations, and refinancing by financial institutions would have helped this crucial cog in the financing wheel to support lending growth. Two, a push to the credit enhancement ecosystem would have been useful to deepen bond markets. Additional support measures for MSMEs would have been helpful.

Mohit Malhotra: The government could have restored tax benefits to companies for R&D investments in Ayurveda. A uniform 5 per cent GST for the entire Ayurveda products market would have been good. Today, 5 per cent GST is levied only on Ayurvedic classical medicines. Over 80 per cent of Ayurvedic products fall under the proprietary and OTC categories that attract 12 per cent GST.

Saugata Bhattacharya: One, would have liked to see more credit guarantee-based measures to incentivise lending to MSMEs. There could have been an indication of plans to join a global EM bond index, given the need to widen investor base for IGBs, with a heavier-than-expected borrowing programme. Three, there could have been a shift from subsidy outlays into direct benefit transfers (which is already underway). Four, given concerns on rising income loss and inequality in the post-pandemic world, there might be a need for stronger social security and safety nets for lower-income households and migrant workers.

What in the Budget will work for the agriculture and rural sector in general and agri-businesses in particular?

Sachchidanand Shukla: The Budget enhanced allocations and focussed on value-addition and augmenting allied infrastructure. To boost value-addition in agriculture and allied products and exports, the scope of operation of the green scheme was extended to include to 22 crops. To augment fisheries infrastructure, it has targeted developing five fishing harbours as hubs - Kochi, Chennai, Vishakhapatnam, Paradeep and Petuagarh.

The Economic Survey calls for government regulation in healthcare sector by stating that there is market failure in unregulated private enterprise. Your comments..

Ranjan Pai: Private healthcare accounts for over 60 per cent of beds and 70 per cent of patient care in India. However, corporate hospital chains form only a fraction of the capacity. Therefore, the context of the comment would need to be better understood as to which of these segments are referred to as suffering from market failure. Given the role that the sector plays in healthcare delivery, setting out clear expectations would be helpful.

The Economic Survey said a rise in public spending from 1 per cent to 2.5-3 per cent of GDP can decrease out-of-pocket expenditure from 65 to 30 per cent of overall healthcare spend. Has allocation in Budget moved in this direction?

Ranjan Pai: We have to understand the allocations after normalising for one-time expenditure on account of Covid. - for example, the cost of vaccination, to gather as to what has been the increase this year as a fraction of GDP. Reaching 3 per cent in any case is a journey over the next three-four years and if a good beginning is made, then that augurs well.

Is the big push towards privatisation feasible?

Zarin Daruwala: The government has shown its resolve to move forward on privatisation and consolidation in the past, carrying relevant stakeholders with them. This push should also be considered in light of the current buoyant conditions in capital markets, which would be supportive to such an initiative. The privatisation of PSBs and a general insurance company would increase competition and improve operational and financial efficiencies within the industries. It will call for a change in law which implies structural and long term, positive reform.

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