Budget 2021 should focus on three 'R's: Relief, recovery and reforms

The Indian economy is in the midst of a better than expected economic recovery. GDP contraction in FY21 is likely to be around 7 per cent, much lower than the 10 per cent contraction feared earlier. Leading indicators like electricity consumption, freight, PMI and crucial data like GST collections and automobile sales point to a V-shaped recovery. Low interest rates have turned out to be a major tailwind for sectors like construction and automobiles. The setting is perfect for a ‘budget like never before’ as finance minister Nirmala Sitharaman has indicated. Will the FM deliver what she has promised?

The FY22 budget should be, ideally, crafted on 3 Rs: Relief, Recovery and Reforms.

Relief
Even though the economy is recovering impressively, there is pain in the MSME sector, which calls for relief. The Emergency Credit Line Guarantee Scheme (ECLGS) for the sector should be continued for one more year. Badly impacted segments like travel and tourism needs timely relief. Covid severely impacted urban employment much more than rural employment. We don’t have an urban counterpart to MGNREGS. The best way to create more urban jobs is to give a fillip to construction. The budget can provide more incentives to housing and construction.

Recovery
The most impressive aspect of the ongoing recovery is that it has been achieved with fiscal prudence. The strategy of allowing monetary policy to do the heavy lifting while keeping the fiscal stimulus modest has turned out to be a brilliant move. The government is now in a position to go for a one-time big fiscal stimulus focusing on spending on vaccination, infrastructure and recapitalization of banks. Expenditure on vaccination has the potential to become a major fiscal boost since it will facilitate fast return to normalcy.

Reforms
Impressive GDP growth of around 11 per cent, assisted by the base effect, is likely in FY22. Nominal GDP growth would be around 16 per cent. But, if the high growth rate is to sustain beyond FY22, we need reforms. The ongoing farmers agitation is proof of how difficult it is to implement reforms in India. But the government should persist and send out a clear message that it is serious on the reform agenda. Bold announcements on privatizations are the need of the hour. Abundant liquidity and historically low interest rates in the developed world is manifesting as huge FPI flows into India. Disinvestment will be easily absorbed in this buoyant market driven primarily by liquidity. The FM should seize this tail wind to sail through privatization.

We need more reforms to accelerate investment. Land acquisition continues to be problematic. Electricity charges for manufacturing are high, thanks to subsidization of power to farmers. This should change.

Don’t tinker with tax rates
The government doesn’t have the fiscal space to give tax sops. This is not the time to tinker with tax rates. The present corporate and personal income tax rates should continue. More importantly, the FM should resist the temptation of imposing the rumored one-time Covid Tax. Taxation of capital gains and dividends also need not be tinkered this year.

In a recent press meet, the FM had said, “we shall be the engine of global growth, for which we need to build capabilities we don't have yet. India needs to be a part of the value chain." Businesses moving away from China will be a major trend, going forward. Countries like Vietnam and Bangladesh are at the forefront of exploiting this opportunity. India should build capabilities to be part of the global supply chain to gain from this megatrend.