Given the circumstances of a difficult economic year during a still ongoing global pandemic, India’s Prime Minister Narendra Modi’s government could have chosen any number of routes while presenting the budget for the 2020-21 financial year.
Modi could have paused the economic reforms in face of the trumped-up protests against the reformist farm laws. Modi government could have legitimately raised taxes to finance its way out of the expenses required to confront a global pandemic.
The path of recklessly printing currency as a way out of a tight fiscal situation could have been another model chosen. New capital expenditure could have been halted given the drain in resources due to a contracting economic year arising out of the lockdowns due to the pandemic.
Or Modi could have simply chosen to be populist and spend on a lot of doles. Each of these routes were suggested in the run up to the budget by either noted commentators, economists or political activists. But what did Modi do?
The year 2020 has seen some of the boldest reforms yet undertaken in India’s recent history, with the three farm laws obviously being the most historic and far reaching.
A falsehoods and misinformation campaign has been unleashed against these farm laws by a section of the Indian opposition political parties. Some of national capital, Delhi’s, entry points have been blocked by mobilising a few thousand activists who like to call themselves farm leaders.
A section of these farm leaders even marched in the streets of Delhi, defying legal guidelines, on India’s Republic Day and unleashed violence on an utterly restrained police force.
Faced with such a spectacle, a different Prime Minister could have backed off from going ahead with any more reforms.
Popular and politically unassailable
After all, if you are already so popular and politically unassailable, why take the risk of implementing something which is being opposed by the exact same people who have advocated the very same reforms for close to three decades?
But that is how Modi is different. The Budget 2021, presented this 1st of February, has been universally hailed as among the most reformist in the last 25 years. Shekhar Gupta, a noted critic of Prime Minister Modi, tweeted “On first reading, this is the least povertarian budget since 1997-98. If its vast & impressive reform promises, especially privatisation are kept, it will end up doing more for the poor than any since then.”
For the first time, a government in India has not been squeamish about privatisation and has instead boldly used the term in the budget. It is a paradigm shift from the days of backdoor disinvestment and signals a new intent to actually bite the bullet.
A policy structure to implement full scale privatisation is already in place and this financial year should see big ticket items like Air India, Public Sector Banks and a few oil companies going down the private route. The government is expecting close to $25 billion in revenues from these stakes sales.
Just a decade ago, FDI in insurance sector was considered the holy grail of reforms in India. Then the aspiration was to increase it to 49% but eventually the move failed. This budget has actually raised the limit to 74%!
Asset monetisation of the national highways authority, the railways, the airports, among others, is another major reform push which has long been advocated but never implemented. This budget has unlocked this productive reform as well.
What about taxes? Just when about everyone was expecting that new taxes will be introduced or at least some cess will be introduced to meet the high expenses, the Budget surprised everyone by not tinkering with the tax rate at all.
The investors have instead been given a predictable, low tax regime in an economy which has already bounced back. On the other hand, tax assessment processes have been reformed by making them faceless at almost all levels and by reducing by half, the time frame during which old assessments can be reopened for scrutiny.
Despite not raising taxes, capital expenditure for the financial year 2022-21 is up by as much as 35% YoY, with a total of more than $100 billion earmarked for this purpose. More than $15 billion of this is for highways construction and another $15 billion for railways related projects.
Other sectors which will see significant sums allotted are urban infrastructure, power sector, ports and shipping, and the petroleum and natural gas sector. All productive, job generating sectors which will further fuel the economy and drive growth.
The government has not tightened its purse in a tough economic year but is instead spending it in record amounts. But not on short term populist measures but in long term asset creating projects. Text book good economics being followed politically.
So, in a nutshell, here is what Modi has managed to pull off in the budget 2021. He has managed to defy detractors and push ahead with the reforms agenda. No new taxes have been raised. Tax compliance has been made easier and more transparent. Tax terrorism is now history. Capital expenditure is up by 35% as compared to the previous year and all of it will be spent in creating productive asset creation — infrastructure.
No populist or mindless doles have been given for short term political gains. The path of printing money as a way out of difficult economic situation has been avoided and inflation has been contained. The governments’ fiscal numbers have been made more transparent and the sharp practices of the past have been dropped.
Privatisation of public sector banks, among other entities to be privatised, has been put on rails — a defining moment in India’s economic history. FDI limit in insurance is now up to 74%, further cementing India’s reputation as the hottest FDI destination, economic slowdown or not.
And to top it all, the health budget of the country has been raised by 137% YoY, including allocating a large sum for vaccinating the country against COVID-19.
All this in one budget.
But this is not all.
Just before the budget, the government had announced, in a first ever such move, fighter aircraft order worth over $6 billion to an Indian defence equipment manufacturer. This is the boldest move yet towards the goal of a Aatmnirbhar Bharat (self-reliant India).
If there is one direct message coming out from Modi in the last few months including and up to this budget then it is this — India will now do whatever it takes to drive growth and seize the post COVID opportunity in an evolving world order.
Read between the lines and there is a second message as well — Modi cannot and will not be distracted or coerced into abandoning what he believes is the correct path for securing India’s rightful economic destiny.
In this sense, the first budget of this decade may well go down in history as the budget which finally put India into double digit growth trajectory.