India’ graded and targeted fiscal and monetary support should be a template for future economic crises
Rarely does a
budget pleases all stakeholders. Union Budget 2021 has achieved the impossible
feat. The government is satisfied that its intention to gradually withdraw from
running businesses, except in four strategic sectors, has been enthusiastically
embraced by the market. The Nifty gained more than 11% over the next fortnight.
Companies are cheering the 34% increase in capital expenditure. The massive
allocation of Rs 5.54 lakh crore to create assets in the coming fiscal year and
the allocation of Rs 1.97 lakh crore for productivity-linked incentive scheme
covering 13 sectors over the next five years will trigger private investment, essential
for growth to sustain. The proposed development financial institution is a
break from the piecemeal approach to infrastructure. The targets to build
roads, railways and metros will spur offtake of commodities, capital goods,
transport, and power. The resultant generation of employment will see higher
inflows into savings and investments, apart from discretionary and
non-discretionary buying. The surging stocks captured the enthusiasm of
investors, particularly after the resilience displayed by most companies in Q3
December 2020 despite the lingering challenges of supply and distribution. The Nifty Bank index flirted with a new high,
spurting more than 11% since the budget, on the prospect of public sector banks
cleaning their balance sheets by disposing of toxic assets to a bad bank and
getting Rs 20000-crore capital infusion to prepare for the anticipated increase
in appetite for credit. The Nifty Realty index galloped 15% in 10 sessions
since end January, reflecting the change in the outlook for developers due to
the growth-oriented budget, low interest rates and profit booked from a
resurgent stock market looking for diversification.
There is
more on the plate for the cautious investors looking for alternatives to the
volatile equities. With the next fiscal year’s borrowings pegged at Rs 12 lakh
crore, there is urgency to attract investment to the debt market. Infrastructure
debt funds can issue zero coupon bonds below face value to capture current
yields. Real estate and investment trusts can get dividend income without TDS
to turn them into hot destinations for FPIs. The most significant change is freeing
government securities to all categories. The jump in individual clients of
brokers even during the lockdown and simultaneous redemption of mutual fund
units indicate retail investors are snatching back decision-making from fund
managers. Small savings schemes will continue to be an important option for a
resources-hungry government. Surprisingly, even the finnicky ratings agencies
have been circumspect. Instead of scolding the government for allowing the
fiscal deficit to spiral to 9.5% of the GDP this year and to 6.8% in the next,
there have been murmurs of understanding. The expenditure splurge, with the
potential to bolster inflationary pressure, has sought to be offset by divestment
and strategic sale of PSUs and monetizing dedicated freight corridors, airports,
and railway infrastructure.
In fact, the
four Atmanirbhar Bharat packages have created a new template for pulling the
economy back from the brink by marrying loose fiscal policies with calibrated
monetary measures. The standard operating procedure of liquidity infusion,
found so effective in the aftermath of the credit crunch of September 2008 and
repeated during the current pandemic, has been enriched by step-by-step policy
support. Instead of dispatching monthly cheques, India deposited cash into the Jan
Dhan accounts of the poor. Besides the quarterly instalment in farmers’
accounts, free ration to the urban and rural poor ensured food security. Access
to low-cost money was eased for the vulnerable sections. Collateral-free loans
to the unorganized sector and partially guaranteed credit lines to NBFCs smoothened
the flow of money in the desired direction. The targets were MSMEs for their
ability to create jobs, home buyers to set in motion demand for housing-related
inputs and farmers, whose disposable income is a magnet for consumption themes
such as consumer durables and non-durables. In the process, India has created a
toolkit to be mimicked to contain future economic crises. The most heartening
outcome has been Prime Minister Narendra Modi’s assertion that damning the
private sector is insulting the youth. After the 1991 dismantling of licence
raj, which was a covert nod to entrepreneurship but celebrated as coexistence
of a mixed economy, the statement in parliament is the most overt
acknowledgement by any government of India of the contribution of
promoter-owned businesses in the country’s development.
