Budget 2021: Expectations and Speculations

With last quarter of FY 2020 battered with the supply-side shock due to COVID-19 and the first three quarters of FY 2020 being stressed due to both, the supply and the demand side shocks, thanks to the Covid induced lockdowns, Budget 2021 will be one of the most important and discussed India budget. Experts and the general population, both are expecting the government to take actions along with the sectors like Healthcare, Infrastructure, welfare and incentive to industries and individuals for investment and growth. Before looking into the expectations and speculations for the new budget, let's look at the major highlights of the Union Budget 2020.
The Union Budget of 2020 was the first full budget of NDA 2.0 government, and with a massive mandate that the ruling coalition gained in the general election 2019, many big bang reforms were expected from the government, and depending upon whom you ask, the ₹ 30 lakh crore budget was either well-balanced or poorly drafted. Some of the major highlights of the same were:

1. Changes in Income tax rates and slabs:

The government first rearranged the IT slabs, with a marginal increment of ₹ 2,50,000 instead of ₹ 5,00,000 while changing the tax rates and introducing a new taxation regime, whereby an individual can opt for the old scheme and keep the deductions that are offered or he can switch over to the new taxation regime with the lower tax rate, and lose the deductions offered in the older regime. Such a transition would have increased spending in the economy but at the cost of saving and personal investment.

1. Lower allotment for the MGNREGA scheme from ₹ 71,000 crore to ₹ 61,500 crores.
2. Plan for launching Krishi Rail and Krishi UDAAN, to make the transport of perishable goods more efficient.
3. Changes in Dividend Distribution Tax, whereby Dividends would be charged at the marginal tax rate of the investor.
4. Funding FCI subsidies through Extra-Budgetary resources. (We shall come back to this)

Sources of Revenue of the Union Government

Sources of Expenditure of the Union Government

As expected, the proportion of revenue from corporate tax went down, due to the lower corporate taxes announced in H2 of 2020. The proportion of GST collection was also lower than the previous year, which is expected to happen this year as well. This has led to the Central government defaulting on the promise of compensating the states for the shortfall in GST collection. In addition to that, the government’s liabilities on pension and subsidies have been increasing, the Finance Minister will have to keep an eye on that.
Now, as conspicuous as it may be, it is important to reiterate that just a few weeks after the budget was announced, COVID-19 and the lockdowns struck and then the government had to make fresh allotments for MGNREGA, plans of Krishi Rail and Krishi Udaan halted, more distribution of food grains was made and earnings of a significant proportion of the population was jeopardized and only a few companies declared dividends. On top of that, fresh direct cash transfer stressed healthcare sector and extra expenditure on welfare schemes, the Fiscal Deficit of the country went up to ₹ 9.14 lakh crore, of about 115% of the annual target for the financial year 2021. Add to that the expected GDP contraction of around 8-9% in addition to far lower than earlier expected GST collection has put the government is a very tight spot of balancing fiscal prudence with providing impetus to growth and employment. Also, the government is staring at increased bills of welfare program, the cost of COVID-19 vaccination and higher expenditure on infrastructure and health.

GST Collection, 2019-20 vs 2020-21

GDP of India over the years

Given such precarious state of affairs, everyone in the country, individuals and businesses have their own set of expectations from the government in the upcoming budget. Following some of the expectations and speculations:

1. Increased deduction and lowered tax income tax: With the majority of workers and professionals in the country facing an increased expenditure, health-related and otherwise, pay-cuts and even job losses, expectations among the daily workers from the government would be for them to lower the taxes and increased standard deductions, as they would hardly avail the LTA and other related deductions.
2. Increased healthcare budget: With the pandemic exposing the terribly weak roots of the Indian healthcare system and an impending sizeable expenditure for vaccination, the expenditure in the healthcare sector is expected to increase to around 2.5% of the GDP, up from 1.3%. In addition to that, the government might also incentivize the purchase of health insurance by allowing higher deduction toward the same. Also, the government must/might expand its PPP based model of healthcare to build hospitals and community clinics in the rural parts, to ensure the availability of better healthcare services in those areas.
3. Infrastructure development: With the new National Infrastructure Pipeline already in action, it is expected that the government will increase the speed of infrastructure development and generate employment along with improving the infrastructure of the country. The NIP is an ambitious plan that GoI launched for the development of infrastructure in the country, with a sanctioned budget of around ₹ 102 lakh crore, or $ 1.4 trillion that would be spread across 2020-2025.
4.  Expand the ambit of Production-Linked Incentives Scheme (PLI): Currently, the government is providing PLI to 10 sectors like pharmaceutical, automobile, telecom and network products etc. The government is expected to expand the ambit of PLI to include laptops and other electronics product, to boost the manufacturing sector in the country.​

With all these expectations from the people and the industries, the government will have a hard time satisfying everyone, while maintaining the Fiscal Deficit under control. Especially the cost of food subsidy, which the government has been fulfilling through Extra-Budgetary Resources (EBR) (by letting the FCI borrow money with the backing of GoI, the government can keep these loans off its balance sheet while the FCI’s loan keeps blowing to around 110 lakh crore in 2020 which is expected to grow even further in 2021) is again going to be a headache for the government, and the allocation is again expected to be made from EBR, which makes the Fiscal Deficit figures rather less useful in the analysis of the economy.
Nevertheless, with improving economic activities, and lower cases of COVID-19 and the possible advent of vaccination in the country in early 2021, we would be keeping a watch on the development leading up to the budget and the budget itself with hopeful enthusiasm.

References:

1. Union Budget (indiabudget.gov.in)
2. https://www.businesstoday.in/current/economy-politics/india-fiscal-deficit-at-115-of-annual-target-during-h1-fy21/story/420336.html
3. Production-linked Incentive Scheme For 10 Sectors | The Story So Far (moneycontrol.com)
4. Budget 2021: FICCI recommends convergence of GST rates to three slabs (livemint.com)
5. Press Information Bureau (pib.gov.in)
6. India | Data (worldbank.org)
7. Budget 2021 India: Get the latest news updates on Union Budget 2021 (livemint.com)
8. Mint Budget 2021 Live Panel: Atmanirbhar Bharat - throwback or industrial leap? - YouTube
9. Budget 2020: Where does rupee comes from and where it goes? | Deccan Herald
10. Budget 2019: Where does the rupee come from and where the rupee goes? Find out | Zee Business (zeebiz.com)