Amid especially heightened expectations, Union Budget 2021-22 has turned out to be cohesive and comprehensive. It has focussed on higher spending on health and infrastructure, transparently accounted for food subsidies and included credible assumptions for tax and non-tax revenues.
Simultaneously, the budget has confirmed a substantial slippage in the fiscal deficit relative to the prior targets for both FY2021 and FY2022, an unavoidable fallout of the pandemic. However, the fiscal consolidation indicated over the medium term is muted relative to our expectation and is a cause for some concern.
In addition to higher spending on healthcare, the focus on providing budgetary support towards growth and employment-generating CAPEX is welcome, especially given the significant catch up required in the ongoing Bharatmala and allied programmes.
The availability of long-term infrastructure financing continues to remain a challenge given the twin problems faced by commercial banks - asset-liability mismatch and increasing share of stressed assets. To address this, the government is looking at an additional vehicle to fund infrastructure projects by setting up a new Development Financial Institution (DFI) with a seed capital of Rs 20,000 crore, targeted to have a lending portfolio of Rs 5 lakh crore in the next three years.
Additionally, to address the funding challenges associated with infrastructure projects, the budget has focused on asset monetisation schemes like REIT and InvITs for redeploying capital in completed projects, in turn strengthening the funding pipeline for new projects.
The budgeted recapitalisation of PSBs of Rs 20,000 crore in FY2022, is in line with ICRA's estimates, assuming that the PSBs will be able to roll over the Additional Tier-I bonds due for maturity in the coming fiscal year. The budgeted capital should be sufficient for increased regulatory as well as growth requirements.
Moving to revenue expenditure, the allocation towards food subsidy has undergone a sharp augmentation to Rs 4.2 lakh crore in the Revised Estimates (RE) for FY2021 from the Budget Estimate (BE) of Rs 1.2 lakh crore, driven by large costs related to the free foodgrain programme, as well as the prepayment of a loan that had been taken by the Food Corporation of India (FCI) from the National Small Savings Fund (NSSF). Subsequently, the outlay for food subsidies has been pared to Rs 2.4 lakh crore in FY2022 BE, although this remains much larger than the actual release of Rs 1.1 lakh crore in FY2020.
In our assessment, the estimates made by the government for net tax revenues and non-tax revenues in FY2021 RE and FY2022 BE, appear to be credible. In particular, the budgeted growth of revenue receipts of 15.0% is in line with expected nominal GDP growth of 14-15% for the coming fiscal year. Despite the ample pipeline, the achievement of the disinvestment target of Rs 1.75 lakh crore for FY2022, will remain predicated on market conditions as well as investor interest.
In terms of fiscal deficit, the RE for FY2021 have revealed a large slippage of Rs 18.5 lakh crore from the budgeted Rs 8.0 lakh crore, led by the downward revision in tax revenue and disinvestment receipts, as well as higher spending. Accordingly, the fiscal deficit of the government has widened to 9.5% of GDP in the RE for FY2021 from the budgeted target of 3.5% of GDP.
The BE for FY2022 indicates a moderation in the fiscal deficit to Rs 15.1 lakh crore or 6.8% of GDP, driven by revenue normalisation. However, the size of the fiscal deficit budgeted for FY2022 exceeds our earlier projection (5.0% of GDP), on account of higher capital spending and food subsidy.
Moreover, the glide path for the correction in the government's fiscal deficit entails a measured reduction to below 4.5% of GDP by FY2026, which is more modest than expected, and a matter for some concern.
In terms of the state governments, the Fifteenth Finance Commission (15th FC) has recommended a higher net market borrowing limit of 4% of GSDP for FY2022, compared to the 3% of GSDP that they were eligible for, prior to FY2021.
Subsequently, the fiscal deficit of the state governments relative to GSDP is recommended to be narrowed to 3.5% in FY2023, before reverting to 3% during FY2024-FY2026.
Moreover, the 15th FC has recommended an additional borrowing of 0.5% of GSDP for FY2022-FY2026, provided that the state governments fulfill certain performance criteria related to power sector. Higher borrowings should help state governments fund a portion of the National Infrastructure Pipeline, while simultaneously increasing the general government borrowings over the medium term.
Overall, while the budget has revealed a plethora of proposals targeted at supporting the nascent economic rebound, the timely implementation of these proposals will be key to sustaining higher growth of the Indian economy in FY2022 and beyond.
(The author is Managing Director and Group CEO, ICRA.)