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Time for big spending – Cover Story News

When Finance Minister Nirmala Sitharaman presents Budget 2021 on February 1, the circumstances that she will do so in will be, without doubt, exceptional. The Covid-19 lockdown last year was an economic earthquake of sorts, comparable to the global financial crisis sparked off by the collapse of Lehman Brothers in September 2008. D.K. Joshi, chief economist at Crisil, says, “No other budget compares as closely to the upcoming one as the one that followed the Lehman Brothers crisis.” Thanks to the fiscal stimuli rolled out in 2008-09, India emerged rather unscathed from that crisis, though the splurge seeded other problems, including a spate of corporate bankruptcies and mounting bad loans in the following years.

Sitharaman’s 2021 budget comes against the background of a recession, with growth in two consecutive quarters in the red (-23.9 per cent in the first quarter of fiscal 2020 and -7.5 per cent in the second). The economy is set to post negative growth for fiscal 2020 as a whole, at an estimated -7.7 per cent. There have only been four instances when budgets have been presented in times of negative growth-1958-59, 1966-67, 1973-74 and 1980-81.

In May last year, to address the cratering economy, the Centre announced the Atmanirbhar Bharat Abhiyan, a Rs 20 lakh crore stimulus that amounted to 10 per cent of India’s GDP (including Rs 8 lakh crore of RBI interventions to boost money flow and provide succour to businesses). However, experts say that much more needs to be done. At the same time, Sitharaman will have to grapple with a ballooning fiscal deficit. The unexpected costs of the pandemic will result in the deficit overshooting the targeted 3.5 per cent of the GDP set for this year by a huge margin, with some estimating it could end up as high as 7 per cent of the GDP. That would make high spending in the coming budget even more difficult.


But spend Sitharaman must, if the economy is to return to its trend growth rate of 5-6 per cent by 2022-23 and use that as a springboard for higher growth as the long-term benefits of the measures announced under the Atmanirbhar Bharat Abhiyan kick in. Over the years, many governments have announced major spending outside the Union budget. But the budget is also a signpost, an opportunity for the government to signal its economic plans to get India onto a higher growth path. “A good budget would include a big directional change for India, because this is an opportunity for such a change,” says a Mumbai-based economist. Some past budgets, like the one in 1991, which took India towards a market-driven economy, or the 1977 budget which expanded the excise net in a push for revenues, have been considered direction-changing.

Economic shock: Real estate project halted during the lockdown, in Greater Noida (Photo: Chandradeep Kumar)

The economic and political backdrop of the budget presentation this year is significant. India’s economy has recovered faster than many expected. GST (goods and services tax) collections have rebounded after falling drastically in the lockdown months, with December collections at an all-time high since the tax was implemented in July 2017-Rs 1.15 lakh crore. Foreign exchange reserves, at $585.3 billion (about Rs 42 lakh crore) in the first week of January, are at a lifetime high. Power consumption is back to pre-Covid levels and active Covid-19 cases are down by nearly 80 per cent. However, while the tide seems to be turning, the economy is clearly not out of the woods yet. According to CMIE (Centre for Monitoring Indian Economy), urban unemployment surged to 8.8 per cent in December from 7 per cent in November, while rural unemployment shot up to 9.2 per cent from 6.2 per cent. The demand for jobs under MNREGA (the Mahatma Gandhi National Rural Employment Guarantee Act) is higher than pre-Covid levels. The MSME (micro, small and medium enterprises) sector still needs support and, if there is a new wave of infections, health budgets and infrastructure will be further stretched. The Chinese aggression on the border will weigh on the budget, as will the agitating farmers who have laid siege to New Delhi. The government may not want to come across as pro-corporate at this particular juncture.


Given these circumstances, what should the government’s priorities be in this budget, and where will it find the resources to fund its spending? India Today spoke to a cross-section of economists (see A Recovery Plan) and industry leaders (see sectoral analyses in this story) to gauge their expectations, predictions and hopes. There is, by and large, a consensus that the government should spend much more, and should not be constrained by its FRBM (Fiscal Responsibility and Budget Management) targets. Most experts agree that the government should target a fiscal deficit between 5 and 7 per cent of the GDP for the next fiscal, although some have cautioned against overspending. (With India’s GDP at about Rs 200 lakh crore, every 1 percentage point relaxation in the fiscal deficit target allows Rs 2 lakh crore of spending.) Healthcare has emerged as a top priority in the wake of the pandemic. A higher budgetary support to states to build better health infrastructure and support for ensuring an efficient vaccine rollout and distribution have been mooted as key focus areas. The government has already given emergency clearance to two vaccines-Covishield, developed by Oxford and AstraZeneca and manufactured by India’s Serum Institute, and Covaxin, developed by Bharat Biotech-with the vaccination drive slated to begin January 16. Improving health infrastructure is critical as India has only five beds per 10,000 population, as against a benchmark of 21 beds for developing countries and 27 for the world. Experts say the government should increase its healthcare spending from the current 1.5 per cent of the GDP to 2.5 per cent.

While the Covid-19-induced lockdown had crippled businesses, several industries have by now limped back to near-normalcy in sales, though they still bear the scars of the lockdown months. Manufacturing has seen a rebound, especially in the automotive sector, alth­ough sales numbers are still a far cry from those in good years like 2018-19. The services sector, including hotels, travel and tourism, has been the hardest hit, and continues to be so. “This is a time to support the nascent recovery in some sectors in manufacturing,” says Joshi. “Also, we need to focus on sectors that have seen no growth at all, such as services.”

Stalled Sales: A Toyota factory parking lot in April (Photo: Jaisong)

Financial year 2021-22 will see a double-digit jump in year-on-year growth, but much of that increase will only reflect the really low base in the previous fiscal. However, the government could use the positive sentiment to push for bigger reforms in manufacturing, say experts. “There is an opportunity to become a big player in the global supply chain,” says Nilesh Shah, MD of Kotak Mahindra Asset Management. “All our competitors are better in terms of infrastructure and decision-making, but they don’t have a domestic market like ours.” He says that the production-linked incentive (PLI) scheme announced under the Atmanirbhar Bharat Abhiyan is a game-changer. The PLI scheme gives companies incentives on incremental sales from products manufactured in domestic units. “If the scheme is executed well, it will add 1.2-1.5 per cent to the GDP,” Shah adds.


Another big area that the government needs to focus on is infrastructure. In the previous budget, it had launched the National Infrastructure Pipeline (NIP), envisaging the completion of 7,300 projects valued at Rs 111 lakh crore in the 2020-25 period. However, raising Rs 20 lakh crore every year for these projects will be enormously challenging. The Centre’s move to set up a development finance institution (DFI) to fund infrastructure projects is looked upon with much anticipation, and an announcement regarding this is expected in the budget. Investing in sectors such as housing, construction and infrastructure will have high multiplier effects. Construction is also a major employment generator.

Essential services A worker at an MSME workshop in New Delhi (Photo: Rajwant Rawat)

The real estate sector, which has for long been saddled with high inventories and weak demand, is looking up. This trend is especially visible in Maharashtra, where the state government, in August, reduced stamp duty on transactions between September 1 and December 31, 2020 by three percentage points and by two percentage points for transactions between January 1 and March 31, 2021. The state government also recently announced a 50 per cent rebate on the various premiums collected for construction of all housing projects, applicable till December 31, 2021. Experts add that the wealth coming in from the booming stock market is also giving the real estate sector some much-needed momentum. This provides a good opportunity for the government to further support the sector by providing sops. Industry players hope for more interventions to boost demand. These include allowing income tax deductions against home loan interest payments (with no upper limit), bringing down the capital gains tax to 10 per cent, lifting the ban on subvention schemes and permitting external commercial borrowing by the sector.

One economist moots the idea of the government getting into building social housing, which could serve both an economic and a political purpose. Although schemes like the Pradhan Mantri Awas Yojana already exist to incentivise beneficiaries to build, in countries like China, the government has entered into building social housing projects. This alone could have a large multiplier effect on economic output. “I don’t think this government believes in a pure demand push, so there is a view that the government could focus on infrastructure spending,” says an economist. “The government could borrow about Rs 1.5 lakh crore on behalf of the states to compensate for any shortfall in revenue,” he adds.


One area that most experts say the Centre needs to pay attention to is boosting consumption expenditure. There are many factors driving this down-for instance, the recovery in manufacturing also came on the back of major job and salary cuts, which curtails consumption. Most do not argue for lower tax rates to boost demand, as the beneficiaries may be those who can afford to pay in any case. With the recent buoyancy in GST collections being seen as a welcome development, tinkering with indirect taxes is also not seen as an option. But an urban equivalent of MNREGA that can create jobs and provide social security to a large section of the population, direct cash transfers and enhanced public investment in infrastructure are seen by many as potential drivers of demand. Encouraging more investments on the ground is equally important. New project announcements in India plunged to a 16-year low in the quarter ended June 2020, as per CMIE data. That means the government will need to keep boosting public expenditure, while building more trust and confidence among private investors.

Madan Sabnavis, chief economist with Care Ratings, says the government may hike capital expenditure from the Rs 4.3 lakh crore last year to Rs 4.6 lakh crore. He says that he expects the thrust of spending to be on MNREGA, roads, railways and urban development.


Where can the money for the increase in expenditure be raised from? One area is PSU (public sector undertaking) disinvestment. In 2020-21, the Centre had set a target of raising Rs 2.14 lakh crore through disinvestment, but that will be missed by a huge margin. However, it has created a pipeline for next year, with Air India, BPCL (Bharat Petroleum Corporation Ltd) and the Shipping Corporation of India on the block. Experts hope for a firm medium-term plan for their divestment, with clear deadlines and revenue forecasts. Monetising government-owned assets in defence and non-defence sectors and fresh 4G and 5G spectrum auctions have also been mooted by experts. Joshi says the government will have to resort to more borrowing. Also, it needs to encourage foreign direct investment in infrastructure.

“Raise resources, but not by raising taxes,” says Shah. “You have to excite investors, and for that, PSUs need to be managed better. The value of government holdings in PSUs can then double.” Another idea is to commercialise some of the government’s successful schemes by roping in private partners. Legalising gambling is another suggestion that has been forwarded to the prime minister’s office. Shah says that fixing tax loopholes can generate additional revenue for the government. Asset monetisation-for instance, monetising government land-is another idea that has been proposed.

Some experts say a better way to raise resources in the present context would be to monetise the deficit (finance extra expenses with money and not debt). They argue that to do so, the RBI should resort to open market purchases of government bonds. Moreover, offering higher interest rates to all savers through small savings schemes would also be a useful exercise.

It is often said that within adversity lies opportunity. The Centre should utilise the present moment to set the country on a clear course of revival-not just to heal the wounds of the pandemic but also to take the country onto the high growth trajectory it has been aspiring to for a long time. Budget 2021 could set the right tone for that.



  • In 2020, housing sales in seven major metros (Delhi, Mumbai, Pune, Bengaluru, Hyderabad, Chennai and Kolkata) fell 47 per cent year-on-year to 138,000 units
  • This year, the supply of new housing is likely to fall 46 per cent, to 128,000 units, in the same metros


  • Sales rose in Q3 & Q4 2020 following discounts by developers and falling interest rates on home loans. Mumbai and Bengaluru saw the highest sales


  • Covid-19 related disruptions will be considered ‘force majeure’ under RERA. Registration and project completion timelines have been extended by six and nine months, respectively
  • The credit-linked subsidy scheme for middle-income families (with annual incomes between Rs 6-18 lakh) is to be extended till March 31, 2021
  • An additional outlay of Rs 18,000 crore has been set aside for the Centre’s PMAY-U housing scheme
  • The permitted differential between agreement values and circle rates has been increased from 10% to 20% till June 30, 2021-a relief to first-time buyers and sellers


Niranjan Hiranandani, Founder & MD, Hiranandani Group

Does the uptick in sales in the past two months signal a revival of demand?

As ‘Mission Unlock’ was rolled out, economic activity gradually resumed. Structural interventions, such as the Maharashtra government reducing stamp duty, the lowering of interest rates by banks and the flexible payment schemes offered by developers were triggers for the increased sales. The renewed consumer confidence as a result of favourable market conditions and the increased significance of owning a home with regards to safety and stability will fuel demand in 2021. Finally, the reduction in premiums across the board for ongoing and new projects under the DCPR 2020 (Development Control and Promotion Regulations) till December 31, 2021, will foster growth.

What measures do you hope to see in the budget for the real estate sector?

Lifting the ban on subvention schemes and enhancing loan-to-value ratios up to 90 per cent across the board will play an important role in positively impacting buyer sentiment.

Allowing income tax deductions for interest paid on home loans (without any ceiling), bringing long-term capital gains tax down to 10 per cent and reducing the period for which home buyers must maintain ownership (to 12 months) to qualify their properties as long-term capital assets will help buyers.

From an industry perspective, permitting a one-time restructuring of loans, doing away with the requirement of units being ‘standard units’ and permitting restructuring for all units as per mutual agreements between financers and borrowers will help.

Permitting external commercial borrowing by the sector, reforms for special economic zones, including extending notification dates and the withdrawal of minimum alternative tax would also help.

Regarding finance, the risk weightage of loans to developers should be commensurate with that in other industries. Banks should fund all aspects of real estate projects, including land, premiums, approval and construction costs.

Could you identify two measures that the Centre should implement to set the economy onto a high growth path?

Two interventions that will bring the economy onto a growth path include a rationalisation in taxes and ensuring that regulatory aspects for ease of doing business remain benign through 2021.



  • The sector was struggling even before the lockdown. It saw 18 per cent degrowth in 2019 because of a slowing economy and high prices following new regulations
  • April 2020 saw zero vehicle sales across India
  • Car sales in this fiscal year are expected to be 25 per cent below those in 2018-19


  • The 2020 festive season (Oct-Dec) came as a relief. Most manufacturers posted higher wholesale growth in December on a year-on-year basis-Maruti Suzuki’s passenger vehicle sales grew 14.6 per cent and Hyundai’s, 25 per cent


R.C. Bhargava, Chairman, Maruti Suzuki

How would you rate the auto industry’s performance in the recent past?

The industry has been going through a rough patch, with a declining growth rate. From 2005 to 2010, the industry grew at a compounded annual growth rate of 12.9 per cent. From 2010 to 2015, the growth rate fell to 5.9 per cent. Over the following five years, growth was as low as 1.3 per cent.

2019-20 was a bad year-prices rose because of regulatory changes, affecting demand, and there are more such changes in the offing. It is only by 2021-22 that we may catch up with the growth we saw in 2018-19. Our approach to private entrepreneurship needs to change.

What are your expectations from the budget?

As far as Maruti is concerned, we don’t have the capacity to do much more than this. More than creating demand, there needs to be serious thought as to why investments are falling. Investments have to be made at least two years in advance for capacity to come up as expected. The question is, how can the government give confidence to the industry to invest?

Is there a key issue that needs to be addressed for the economy at large?

Indian manufacturing needs to become more competitive. For this, the industry and the government must work together. If manufacturing grows faster, the economy will also grow accordingly. The main driver for employment, even in the services sector, is manufacturing, due to the huge aftermarket. The industry is picking up, but there is not much difference compared to, say, three years ago.



  • New projects plunged to a 16-year low in the quarter ended June 2020, as per CMIE data
  • There is no clarity on how the government will fund the huge existing pipeline of infrastructure projects
  • Many projects are mired in red tape and are suffering delays as a result of problems in land acquisition


  • The Centre launched the National Infrastructure Pipeline in its last budget. This envisaged the completion of 7,300 infra projects at a total cost of Rs 111 lakh crore from 2020-25
  • The government is looking to set up a development finance institution to fund these infrastructure projects


Vinayak Chatterjee, Chairman, Feedback Infra

Where do infrastructure projects stand in terms of the government’s focus and implementation?

The Centre has broadened its focus from heavy construction projects like highways. In the past three years, there has also been major spending on 24×7 electricity and water connections for households. The other real push has been in railways, such as metro rails for cities, the Dedicated Freight Corridor, the bullet train and so on.

Are you satisfied with the progress of the NIP (National Infrastructure Pipeline)?

The allocation for infrastructure in the last budget was Rs 4.12 lakh crore, but in the first six months, capital expenditure fell by 27 per cent. Though it picked up significantly in the Oct-Nov period, I suspect that by March 31, we will fall short of the spending target. This budget will have to make up the shortfall.

What measures do you expect from the budget to boost infrastructure?

My expectation is that the finance minister will increase the fiscal deficit by two percentage points and allocate the funds to public works and infrastructure creation, including in healthcare. A two percentage point relaxation of the fiscal deficit releases an additional Rs 4 lakh crore. Added to last year’s allocation, this takes the total possible expenditure on infrastructure to Rs 8 lakh crore.

However, the question is that since the NIP envisages an expenditure of Rs 20 lakh crore per annum but the maximum capacity of the Union budget to finance the NIP is Rs 8 lakh crore, where will the balance Rs 12 lakh crore come from? Private investors won’t put in the money. Public sector units such as the National Thermal Power Corporation, Coal India and other state PSUs can together put in Rs 3-4 lakh crore. State government finances are in tatters and they may just be able to put in another Rs 2 lakh crore.

Will the budget implement a development finance institution (DFI)?

In principle, the government has accepted the idea of a DFI to fund the NIP. It could be a major budget announcement, and a draft bill is also being made ready.

However, we need to have shovel-ready projects. Infrastructure projects normally have a developmental cycle of four years. India needs to have Rs 80 lakh crore of shovel-ready projects in the next three-four years.



  • Access to finance is a problem. While the moratorium on interest payments helped, many MSMEs still struggle to make payments
  • The new rules for reporting NPAs-under which a payment delayed for 30 days leads to a loan account being classified as ‘special mention’-could cause many loans to MSMEs seeing increased scrutiny


To support the sector, the government has made an effort to increase purchases from MSMEs; between January and October 2020, there was a 25 per cent increase in public procurement from such firms


  • The government has implemented an emergency credit line for the sector totalling Rs 3 lakh crore. The available credit is 20 per cent of credit outstanding as of Feb 29, 2020
  • A similar measure is Rs 20,000 crore of subordinate debt for MSMEs. Under this scheme,
  • promoters are issued debt by banks, which is then infused into the firm as promoter equity
  • The government has also set up a Rs 50,000 crore ‘fund of funds’ for additional equity infusion
  • To promote domestic procurement, global tenders are disallowed for procurements valued up to Rs 200 crore
  • The government has implemented a new classification system for MSMEs to encourage growth


Anil Bhardwaj, Secretary general, Federation of Indian Micro and Small & Medium Enterprises

How severe are the production issues in the MSME sector?

Many factories have closed because of the lockdown. There has been a steep decline in production and sales because of issues like transport not functioning and payments being stuck. We are miles from normalcy; we expect 2021-22 to be a period of muted growth for MSMEs. The sector is still far from normal levels of production, and requires special flexibilities.

What sort of flexibilities?

We propose flexibility be given to banks for loan sanctioning. The Basel norms (supervisory standards in the banking sector) were finalised during years of robust growth. They are now a handicap. The government and the RBI should consider suspending these for a few years. One problem is the way NPAs are identified-it is completely automated. If a payment is delayed for 30 days, the account is automatically classified as a ‘special mention’ account.

What impact has the government’s credit scheme had on the sector?

The scheme has benefitted companies that had taken loans, but only about 10 per cent of MSMEs have institutional funds. The industry has responded well to the Trade Receivable Discounting System, which gives routinely cash-strapped MSMEs a method of raising funds by selling trade receivables from corporates.

What measures do you hope for in the budget to boost the MSME sector?

The Insolvency and Bankruptcy Code only has provisions for large firms-there are no specific provisions for MSMEs. This is one change we hope to see. We also hope there is an easing of the Foreign Exchange Management Act and that banks are given greater flexibility in lending.



  • The complications of the Covid-19 lockdown-like the moratorium on interest payments and the emergency credit line guarantee scheme-will add to existing troubles
  • The RBI’s financial stability report says that gross non-performing assets are expected to rise to 13.5 per cent of advances by Sep 2021, up from 7.5 per cent in the same month in the previous year
  • There is an urgent need for recapitalisation of public sector banks, despite capital infusions totalling
  • Rs 3.16 lakh crore being done from 2016-2020
  • Misgovernance and fraud are persistent problems; in 2019-20, Indian banks lost Rs 1.85 lakh crore to fraud

Health scare: Customers and officials wearing masks at a bank in Bengaluru (Photo: AFP via Getty Images)


  • The government has approved the merger of 10 public sector banks into four, which it says will transform the competitive landscape
  • Between 2015-16 and 2019-20, digital payment volumes have grown at a compounded annual growth rate of over 55 per cent


Rajnish Kumar, Former Chairman, State Bank of India

How urgent is the need to recapitalise public sector banks?

The RBI’s latest financial stability report has brought out the need to build up capital buffers in the banking sector. Public sector banks will find it difficult to raise capital from the market. Inevitably, the government will have to make provisions in the budget to provide capital.

In the previous budget, there was talk of setting up development finance institutions. Will these materialise this time around?

Infrastructure financing needs a major push and neither the central nor the state governments can fund the National Infrastructure Pipeline. Public sector banks cannot do it either. A well-structured and well-capitalised development finance institution is required to lead infrastructure financing in India.

Will the budget open up avenues for the setting up of a ‘bad bank’ (to take bad debts off other banks’ books)?

There is no more opportune time than right now to create a bad bank. This will allow non-performing assets to be consolidated in a single institution, which will lead to a faster resolution of bad debts.

What key measures would you like to see in the budget to drive growth, given that the economy is in recession?

This budget will be one of the most challenging. The government needs to leave no stone unturned in its efforts to rescue the economy from recession. Three important measures that could instantly spur demand are a reduction in personal income tax rates to boost consumption expenditure, an increase in expenditure on infrastructure and support for sectors that have been badly hit, such as tourism and construction, which will create employment opportunities. The government should also implement measures to strengthen the financial sector.



  • Despite efforts by successive governments, manufacturing’s share of GDP has been stuck at 16 per cent for some years now
  • Covid-19 brought most manufacturing to a halt. While the Oct-Dec period saw a spurt in activity from pent-up and festive demand, it may not be sustainable


  • Under the Atmanirbhar Bharat Abhiyan, a slew of programmes have been announced to boost production, such as the production-linked incentive scheme
  • The Reserve Bank of India’s six-month moratorium on loan repayments gave the sector a breather, as revenues had dried up


Naushad Forbes, Co-chairman, Forbes Marshall and former President, CII

Is manufacturing seeing a recovery? What more needs to be done?

Manufacturing depends on the overall health of the economy-we need to focus on that rather than on just manufacturing. In the second quarter, we saw a significant recovery, including in FMCG, pharma and chemicals. In Q3, the recovery was wider, including in engineering and automotives. However, salaries have fallen drastically-that can become a problem as 60 per cent of our growth in the past 30 years has come from consumption.

What are your expectations from the budget?

The Atmanirbhar Bharat Abhiyan and the production-linked incentives scheme are aimed at increasing the depth in manufacturing. We don’t need more than that, but there should be something to supplement it. We also need long-term clarity about policies. When will the tariff protections that have been brought in for thousands of products over the past four years expire? Industries need to know what to expect. Only then can they invest properly.

What budget measures would you recommend to revive the economy?

Measures need to be analysed for their impact on the ease of doing business. There should be a review mechanism with private participation. The government needs to win the trust of entrepreneurs to ensure investment happens.

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