Budget 2021

Coming in the midst of the immense damage inflicted on the Indian economy by the COVID-19 pandemic, the 2021–22 Union Budget needed to perform the unenviable task of compensating households for massive livelihood losses as well as stimulating economic growth while maintaining some fiscal discipline. As it turned out, the government chose to focus on the second and third goals and largely ignored the first.

The growth rate of manufacturing value added has been declining continuously since 2016–17 and it had become negative in 2019–20, even before the intensification of the Covid-19 crisis, suggesting that the budget needs to address the structural weaknesses of the economy. The 2021–22 budget has largely adopted the supply side corrective measures in the form of increased capital expenditure on infrastructure. The potential of infrastructure investment in reviving the sector and the implications of the proposed resource mobilisation for financing the increased capital expenditure are discussed. In the context of increased global fragmentation of production, the feasibility of promoting domestic production through tariff protection is also discussed.

Budget 2021–22 has been presented in the context of a sharp slowdown in an economy battered by a severe contraction due to the lockdown. The pandemic has only contributed to the worsening of the humanitarian crisis, as is evident from data on hunger, malnutrition and employment. This budget provided a historic opportunity to use fiscal resources to provide a vision for economic recovery, and also to create enabling infrastructure and provide resources for improving the lives of people suffering from the twin shocks of slowdown and the pandemic. Despite the urgent need to invest in the social sector, the failure of the budget to allocate resources will be detrimental to the progress made in the last two decades.

The budget for 2021–22 is important for three reasons. First, it provides a reality check on the government’s attempt to keep up public spending in the wake of severe contraction in revenues and expansion in expenditures needed to save lives and livelihoods. Second, it shows the large increases in deficits and debt in the already prevailing stressed fiscal environment. Third, as the economy was already slowing down even before the pandemic due to structural factors, it attempts to provide reform signals to reclaim the earlier growth trajectory. While it has tried to prioritise growth, there is considerable risk from burgeoning deficits and the possible impact in price stability from large liquidity infusion to facilitate government borrowing at low cost that is likely to occur. The reform proposals are important, but the test lies in how effectively they are implemented.

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