Budget 2021: Focus on demand generation, smart asset monetisation

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There is a consensus that the annual contraction in the Indian economy for FY21 is going to be more than 7 percent, however the worst case scenario may be  while the upper limit projected for this contraction stands at around 10 percent. There is also agreement that the growth rate will be close to a low double-digit in FY22. These indicators may be good enough to give us the confidence that the economy is coming back on its feet, however, the question remains—once it's back, will it be limping, walking or sprinting?

While indicators on Goods and Services Tax (GST) collections, passenger vehicle registrations, and the import rebound give us confidence, the dip in fuel sales and weak non-food credit growth is a sign for us to tread cautiously. The Q4 performance of the economy will put to rest the question whether the demand revival was due to a combination of short-term pent-up and festival demand, and restocking post-festive season or because there has been a strengthening of a more sustainable demand.

The contraction in the economy has an impact on aggregate demand. The focus of the Union Budget 2021, therefore, should be on demand generation. Venturing with an additional deficit of 2 percentage points (over 3.5 percent of last year) and pegging it at around 5.5 percent will give over Rs 4 trillion to the government towards demand generation measures. Over the business-as-usual incremental budgets that are prepared, these additional resources can be spent equally under four umbrellas to generate demand.

Higher allocation to MGNREGA First, to generate demand and provide succor at the bottom of the pyramid, there has to be a higher allocation to the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), and then utilise MGNREGA towards the creation of farm storage infrastructure.

Create employment
Second, create employment in construction by spending on ongoing or incomplete infrastructure projects.

Increase capital provisioning for banks
The third area will be capital provisioning to banks for targeted lending to MSMEs with credit guarantee, as MSMEs have suffered the most during the pandemic, and they can provide large employment numbers.

Put more money in the hands of people
And finally, the fourth area will be giving more money in the hands of the taxpayers, especially the salaried lower middle class, through additional one-time standard deduction measures and not tax saving interventions.

On the resource generation front, a part of the additional outlays will come back to the government by way of taxes on consumption. Additional resource generation through aggressive asset monetisation should continue to unlock the value from the past investments of the government.

In addition, smart asset monetisation programs need to be undertaken. An example of smart monetisation will be to focus on infrastructure projects nearing completion and those that are likely to be completed during FY22. The process for monetisation of such infrastructure projects could be initiated early in the year and the assets can be immediately monetised post-completion. The resource generation can be much higher than the spending on such projects during the year. Thus, instead of spreading the available resource available too thin, there can be focused spending on projects that are over 90 percent complete.

The government needs to demonstrate its intention of reviving the demand and getting the economic engine going. Finance Minister Nirmala Sitharaman can afford a two-percentage-point additional one-time deficit with a glide path of 4.5 percent, 4 percent, and 3.5 percent deficit targets over the next three fiscal years given the long-term India story is fully intact. The glide path and quality of deficit will also help soothe the nervousness of the sovereign rating agencies towards sustainability and serviceability of the public debt and mitigate the risk of any sovereign rating downgrade.

The writer is Leader, Economic Advisory Services at PwC India

The thoughts and opinions shared here are of the author.