This time around the FRBM target could be postponed by a few years until GDP returns to trend growth, employment improves, and tax buoyancy returns.

Last year’s Union Budget estimates have been altered dramatically as growth, income, and expenditure projections were severely impacted due to the COVID-19 pandemic.

There is no doubt that the upcoming Union Budget must be revolutionary, in order to revive from this unprecedented catastrophe.

– Rising Unemployment (especially in the informal segment) was an existing area of concern which got accentuated by Covid-19. The infrastructure sector can act as a savior here as it has a multiplier effect in generating employment.

Hence, the focus could be on Construction (Roads, Railways, Metro, Ports, Airports, Defense), Real Estate (Affordable and Urban Housing), and Textiles (from yarn to garments) as these primarily create blue-collar jobs and help MSMEs to thrive.

In this regard, setting up a well-capitalized Infrastructure DFI to meet the long-term funding needs of the sector could be on the agenda.

– PLI schemes under Atmanirbhar Bharat could also be expanded to several other niche sectors – Specialty and Argo Chemicals, Finished Apparel, Footwear, Toys, FMEG, Semiconductor chips – from the perspective of import substitution.

This would also help Make in India program, make India self-reliant and benefit from MNC’s China+1 strategy. This would provide a fillip to the manufacturing sector and could add significantly to India’s GDP and job growth.

– Banking system credit growth has been anemic at 56% in CY20 due to risk aversion from lenders and lower private capex / working capital demand from corporates driven by normal business disruptions and subsequent capacity underutilization.

The government could continue with the recapitalization of PSU Banks to stimulate credit growth and offer fiscal support to COVID-hit sectors like hospitality, restaurants, travel and tourism, aviation, shopping centers/malls, and cinema halls/multiplexes.

– The creation of a Bad Bank could also be in the works to avoid a repeat of the recent bad experience of banks with corporate NPAs.

To ensure the government stays prudent with its debt and does not go overboard, fiscal deficit targets had been set under the FRBM (Fiscal Responsibility and Budget Management), but they have always had to be deferred.

Given actual receipts – tax collections and non-tax proceeds – have missed forecasts by a wide margin and expenditures have stayed high, fiscal deficit has already reached 135 percent of BE by Nov-20 end.

FY21 consolidated (center + state) deficit is now expected at 12-13% of GDP vs an expected 6-7%. As enumerated above, notwithstanding the lack of fiscal space, the elevated government spending must continue to support GDP till other factors like a private investment, consumption, and export growth do not normalize.

So, this time around the FRBM target could be postponed by a few years until GDP returns to trend growth, employment improves, and tax buoyancy returns.

Related to this is a long-awaited debt market reform. Investors concerned with persistently high inflation and fiscal deficit overhang have been demanding commensurate rewards to fulfill the large borrowing needs of the government leading to a tussle with the RBI with respect to G-Sec yields.

Lack of FII participation in debt markets has also led to the burden falling completely on DII. Steps towards including in global bonds indices could bring down the cost of capital with steady flows into Indian bond markets.

Two years back proposed Sov Bond issuance, but not been pursued. Capital market reforms and greater inclusion of India in global debt indices could lead to wider DII participation and attract FII. China has benefited from such actions.

It is necessary for India to widen its direct tax base and increase the ratio of direct tax to GDP as it will help solve the revenue problem and address rising inequality which has been more exacerbated by Covid-19.

A step in that direction would be the Direct Tax Code which will simplify the direct tax laws and regulations into a single legislation.

The government has already begun phasing out the multiplicity of tax exemptions and deductions and could continue this path to make the tax system more effective and efficient.

(The author is Validus Wealth)

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