Where is the fiscal deficit headed?
The fiscal deficit for 2020-21 is expected to increase to ₹18.49 trillion or 9.5% of GDP. It was budgeted at 3.5% of GDP. The fiscal deficit is the difference between what a government earns and what it spends. Gross tax collection is expected to decrease by 21.6% for ₹19 billion this year. In a pandemic year, aside from union excise taxes, revenue from all other major taxes fell, driving up the deficit. The collection of excise taxes increased to ₹3.61 trillion compared to budgeted ₹2.67 trillion, thanks to an increase in the excise tax on gasoline and diesel. The fiscal deficit for 2021-22 is expected to be ₹15.07 trillion or 6.8% of GDP.
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Other than lower tax collection, is there any other reason for this jump?
The Food Corporation of India (FCI) buys rice and wheat directly from farmers and sells them at a much lower price through the public distribution system. The government has to compensate FCI for this subsidy. In fact, until last year, the government did not fully compensate FCI for this. Among other things, the FCI had to borrow money from the National Small Savings Fund, where all the money from the small savings plans ends up, to fill the gap. The government has decided to discontinue this and take subsidies as part of its total spending. Because of this, the food subsidies offered to FCI this year have jumped to ₹3.44 billion against ₹75,000 crore last year. This has also increased the deficit over the next year.
Are there treats for the middle class?
The good news is that tax levels and tax rates stayed the same. There was also good news for seniors who only earn a pension and interest income. They will now be exempt from filing income tax returns. This should be of some help, especially for retired government and public sector employees. Furthermore, no wealth tax was introduced, nor was the capital gains tax on stocks manipulated. This led BSE Sensex to rally 2,315 points, or 5%, from the close on Friday. In addition to this, the additional deduction of ₹1.5 lakh, which is currently available on the interest paid on a home loan to buy an affordable home, will continue to be available next year.
How much has the government increased spending?
Public spending this year will be ₹34.50 billion, 13.5% more than budgeted ₹30.42 billion. About 34% of this spending will take place between January and March 2021. The government is stepping in as the spender of last resort, in an environment where consumer spending and industrial expansion have taken a beating. Interestingly, the total spending budgeted for next year is ₹34.83 trillion, which is roughly similar to this year. This, despite the fact that the government is initiating many new road projects.
So where does the fiscal stimulus leave that?
When taking into account the fact that the government will spend ₹8.1 trillion to pay interest on its debt next year, against ₹6.93 trillion you will pay this year, net, the actual spending next year will actually go down. In that sense, the government’s fiscal stimulus arrived in 2020-21, with a massive increase in spending of 28.4% compared to 2019-20.
Hasn’t there been a massive jump in health spending?
A quantity of ₹35,000 crore has been provided for the covid-19 vaccine for 2021-22. Additionally, the total allocation for health and wellness for 2021-22 is ₹2.24 trillion, 137% more compared to this year. This also includes a grant of ₹Rs 36,022 million towards water and sanitation. The government also plans to launch a new centrally sponsored scheme, PM Atma Nirbhar Swasth Bharat Yojana, to strengthen the current health systems in the country. The scheme has an outlay of around ₹Rs 64,180 crore in six years.
Will the government finally seek a major divestment?
The government hopes to win ₹1.75 trillion through the divestment route next year. He hopes to sell his stake in many companies, including BPCL, Air India, Shipping Corporation of India, BEML, etc. It also hopes to privatize IDBI Bank and two other public sector banks and a general insurance company. The government also hopes to bring the initial public offering of Life Insurance Corporation of India. The target seems a bit stretched since the government expected to win ₹2.1 trillion through the divestment route this year and has only been able to earn ₹15,220 crore as of January 20. If the government needs to achieve this goal, it should start selling stakes as soon as 2021-22 starts.
What are the new features proposed in the budget?
One of the innovative proposals is the sale of surplus land in the hands of government ministries and public sector companies. This is a good way to raise money to finance infrastructure projects. The government has raised the limit on foreign direct investment in insurance companies to 74%, from the current 49%. It also plans to launch a development finance institution (DFI) to finance Indian infrastructure. There are also plans to launch a “bad bank” to take over bad loans from public sector banks and help them clean up their balance sheets.
Why has this happened to the Mahatma Gandhi Rural Employment Guarantee Scheme (MRNREGS) allocations?
The MGNREGS proved to be one of the saviors of the Indian economy this year, creating jobs in rural India, with the government allocating ₹1.12 trillion towards the plan. However, the allocation for 2021-22 has been reduced to ₹Rs 73 billion by 34.5%. This is a bit surprising given that the economy is still struggling. Beyond this, the government plans to extend the Ujjwala scheme that has benefited 8 crore households to cover an additional 1 crore of beneficiaries.
What about higher import duties on goods?
As in previous years, the Finance Minister has increased import tariffs on a large number of goods in sectors such as agriculture, chemicals, plastics, automobiles, gems and jewelry, etc. This is in line with the Atmanirbhar India narrative. The idea is that by making imports more expensive, domestic producers will become competitive and, therefore, gain market share. The problem is that the Indian consumer will end up paying more for it. Also, it doesn’t help if Indian companies have to compete internationally because in order to be competitive in exports, they must first be able to compete domestically.
(Vivek Kaul is the author of Bad Money).
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