India budget
Indian Finance Minister Nirmala Sitharaman, center left, and junior Finance Minister Anurag Thakur, left, stands for the media outside the finance ministry before proceeding towards the parliament house to unveil the annual federal budget in New Delhi, India, Friday, July 5, 2019. Image Credit: AP

India will look beyond fiscal deficits to get the economy back on its feet. That’s the message conveyed by Finance Minister Nirmala Sitharaman in the annual budget for 2021-22, presented on Monday (February 1, 2021).

India’s spending plan aims to jumpstart the economy that has been going through a protracted slump in 2020-21 fiscal year with the GDP growth projected to contract by 7.8 per cent. That’s hardly surprising since all other major economies have taken the fiscal boost route to revive the flagging economic growth.

Under the current environment, government spending is a significant component to boost production, consumption and job creation. Of course, it has long-term consequences in terms of potential debt overhang, a surge in inflation, huge interest in government borrowings and currency instability and potential payment crisis in the future.

Pictures: India’s Finance Minister Sitharaman presents union budget

The government will increase capital expenditure to Rs5.54 trillion in the next fiscal year from a revised Rs4.39 trillion in the current year, although total spending increased by less than 1 percentage point from this year’s revised estimate of Rs34.5 trillion.

In the global context, India’s deficit challenge is not unique. Other emerging-market heavyweights also are seeing their fiscal deficits balloon as they fight the pandemic.


The finance minister has accorded special attention to the healthcare sector, increasing the overall outlay to nearly Rs2.25 trillion, an increase of more than 135 per cent over last year. The enhanced allocation includes area such as nutrition, sanitation, clean drinking water and pollution control. The allocation of Rs350 billion towards COVID-19 vaccination is also a welcome step.


India requires massive infrastructure investments for growth. The government’s big fiscal boost will go a long way in modernising roads, rail, air and water transport networks.

The proposal to involve the private sector through public-private partnerships and monetisation of existing infrastructure through full or part sale will add to the government revenues and make the capital expenditures more efficient.

Some of the key spending plans for the infrastructure sector include Rs2.87 trillion ($39.40 billion) allocation for clean water supplies over the next five years, Rs3 trillion ($41.10 billion) for power sector for next five years and Rs10 billion rupees ($137.01 million) for Solar Energy Corporation of India.

As the government navigates the tightrope of balancing economic growth and addressing fiscal concerns, a hike in infrastructure spending in the budget holds the potential to deliver higher economic growth. The budget proposal to enable entry of foreign portfolio investors (FPIs) into debt financing of Infrastructure Investment Trusts will open new funding avenues.

Support for financial services

The plan to set up a development finance institution to fund the infrastructure pipeline is a significant step. The introduction of an asset reconstruction company (for banking) is likely to provide the much-needed support for banks as stressed assets rise due to the pandemic. To address concerns around asset quality, credit loss and liquidity stress, this budget has been proactive in infusing additional capital of 200 billion rupees to PSU banks for providing continued credit access to wholesale and retail borrowers, and therefore push growth agenda. One of the most significant proposals in the budget 2021-22 is to increase the foreign investment cap in insurance to 74 per cent from 49 per cent.

Revenue the weak link

Even as India’s revenue collection has been declining due to COVID induced lockdowns, the 2021-22 budget is short on new revenue augmenting tax reforms. No major changes are seen in direct and indirect taxes except for a few changes in import duties targeted at supporting domestic companies.

While the tax revenue shortfall will widen the fiscal deficit, the government has partly addressed it through government asset sales, disinvestment in public sector companies and monetisation of some government-owned infrastructure such as toll-roads, airports and key rail corridors.

Looming fiscal deficit

Lower revenues stemming from higher spending will result in higher fiscal deficits. The finance minister has projected a fiscal deficit of 6.8 per cent of gross domestic product for 2021-22. The current year is expected to end with a deficit of 9.5 per cent — up from the 7 per cent expected earlier and the medium-term target of 3 per cent.

Millions of people lost their jobs when the government ordered a lockdown last year to combat the coronavirus. The government estimates that the economy will contract 7.7 per cent in the current fiscal year ending in March but then recover to show 11 per cent growth in 2021-22, That would make India the world’s fastest-growing major economy ahead of China’s projected 8.1 per cent growth.

India budget 21-22
Image Credit: Gulf News

COMMENT: In pursuit of growth, the deficit is no longer an anathema

India's bold spending plan of Rs34.83 trillion ($477.16 billion), risking higher and longer fiscal deficits to lift the country out of the COVID-19 induced economic slump expected to see a GDP contraction of about 7.8 per cent in the current financial year.

Sitharaman’s plan to reboot the economy and gain the pace for a sustainable growth comes with a massive capital expenditure outlay, spanning infrastructure, healthcare, agriculture, energy, domestic production and exports.

Clearly, Asia’s third-largest economy is betting big on government spending to bring back GDP growth, jobs, consumer demand and improvements in public health.

The budget has increased capital expenditure to Rs5.54 trillion in the next fiscal from a revised Rs4.39 trillion in the current year, although total spending increased by less than 1 percentage point from this year’s revised estimate of Rs34.5 trillion.

Like other major global economies, India too has no other choice but to spend its way out of the slump and get back to a growth trajectory that supports the livelihoods of its hundreds of millions of people. However, its impact on public finance will be huge in terms of revenue augmentation and managing deficits in the long term.

While the government has been lagging in revenue collection following the pandemic, the budget has not significantly changed the direct and indirect taxes. On the revenue side, it relies on proposals such as higher customs levies on some imports to boost self-reliance, selling state assets and public sector dividend income.

Additionally, Sitharaman plans to raise 1.75 trillion rupees by selling state assets. That leaves a significant revenue gap, which the government plans to bridge through public borrowing to the tune of Rs12 trillion.

Clearly, that will widen the fiscal deficit for an extended period. For the current financial year, it is estimated at 9.5 per cent of GDP; for 2021-22 it is projected at 6.8 per cent, and it is likely to remain elevated above 5 per cent through 2025-26. That simply means the government’s plans of keeping fiscal deficits below 3 per cent will remain a moving target in the near future.

The bulging fiscal deficits for a longer period and lower interest rates come with the risk of higher inflation and pressure on the currency. The government’s immediate concern is to revive growth, and the budget largely has succeeded in addressing it. However, as the economy picks up momentum, the government should work on bringing down public debt and fiscal deficit.

NRIs in UAE: What are the effects of India Budget 2021 on your money?

For Non-Resident Indians (NRIs) living in the UAE, how does the changes announced in the India Budget 2021 affect your personal finances and investments in India? Let’s find out. Read more

NRIs can operate one person companies in India

India will allow Non-Resident Indians to set up one person companies (OPC) in the country. The announcement came in the annual budget presented by Finance Minister Nirmala Sitharaman in New Delhi on Monday.

This is part of efforts to promote entrepreneurship and innovation in India. The government will also reduce compliance for one person companies (firms with a single member, unlike the traditional ones with at least two members).

The new incentives will allow these companies to grow without restrictions on paid-up capital and turnover. They can also be converted into any other type of company at any time. The residency limit for an Indian citizen to set up an one person company has been reduced from 182 days to 120. This will benefit the Non-Resident Indians.

The induction of was provided in the Dr J.J Irani Committee report of 2005. As per the Companies Act, 2013, if the paid-up share capital limit exceeds the prescribed limit (currently 5 million rupees) or turnover exceeds 20 million rupees in three years, the company will cease to be a one person company.

The budget has scrapped the requirements.

India budget 21-22 highlights
Image Credit: Vijith Pulikkal, Assistant Product Manager

What NRI businessmen in UAE have to say about India budget 2021

Adeeb Ahamed

“This will boost investments into the country, certainly,” said Adeeb Ahamed, who heads LuLu Exchange International. "There will be no restriction on paid-up capital and turnover. Most important, a one-person company can be converted to any other kind. Overall, this is a good budget for NRIs who wish to contribute to Digital India’s growth story..."

Ram Buxani

"We could hear refreshing terminology in today’s speech by Nirmala Sitaraman such as "Tax system has to be transparent", said Ram Buxani, a doyen of the NRI community in the UAE. "The importance given to the UAE in the speech itself makes NRIs here proud.


"As a businessman I am very glad to note that there are some very specific steps being taken to tap the NRI investments," said Yussufali of LuLu Group. "Kerala-specific announcements such as development of major fishing harbours - including Kochi - huge allocation to further expand highway infrastructure, and the Kochi Metro will surely boost state’s economy and make it more business-friendly."

Dr. Azad Moopen

"We are glad that the total budget outlay for health and well-being has increased by 137 per cent, standing at Rs.2.23 trillion," said Dr. Azad Moopen, Chairman and Managing Director of Aster DM Healthcare.

Anis Sajan

“Building materials sectors like steel will benefit in exports to India because of the duty reduction," said Anis Sajan, Managing Director of Danube Group. "Manucturers in India had hiked prices and this stand taken by the government to reduce import duty will help India's developers to look at other options."

Dr Dhananjay Datar

"This budget is clearly focussed on growth and will accelerate growth rates," said Dr Dhananjay Datar of Al Adil Trading. "The stock market response is a clear indication of the fact that the budget is seen as being in the right direction. On the whole this is a pro-people... and everyone stands to gain."

India imposes duty on cotton imports to support farmers

India, the world's biggest cotton grower, imposed a 10% duty on imports of the fiber to help farmers, Sitharaman said in her budget speech in parliament on Monday.

The tax comprises a basic customs duty of 5% and an additional 5% levy to finance the development of agricultural infrastructure in the country, according to the budget documents.

A levy on overseas purchases will potentially support local prices amid higher domestic production and prevent distress sales by the growers. There was no duty on cotton imports until now.

The government also raised the levy on raw silk and silk yarn to 15% from 10%, according to the minister.

India's cotton output may climb to 37.12 million bales of 170 kilograms each in 2020-21, from 35.49 million bales a year earlier, according to the farm ministry. Imports are expected to fall to 1.4 million bales this year from 1.55 million bales in 2019-20, according to the Cotton Association of India.

The state-run Cotton Corp. of India will increase purchases from farmers to 12.5 million bales in 2020-21 from 10.5 million bales a year earlier, according to the textile ministry. The government plans to spend 350 billion rupees ($4.8 billion) to buy cotton, compared with 285 billion rupees a year ago.

Experiences of India's yearlong fight with COVID shaped budget: Health Minister

The total allocation of Rs 2,23,846 crore for the health sector in the budget will be of immense help to the country at this critical juncture when it is dealing with the COVID-19 pandemic, said Union Minister of Health and Family Welfare Dr Harsh Vardhan on Monday.

In a media address, Dr Harsh Vardhan said the experiences of the country's yearlong fight with COVID have shaped the Union Budget.

He thanked Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman for "moving health and well being to the centre stage of India's governance as the country battles COVID and is also targeting to eliminate diseases like TB and immunize India's children against 12 communicable diseases".

India's modest budget?

The world's biggest economies are trying to borrow and spend their way out of the pandemic, from the European Union's $900 billion stimulus package to President Joe Biden's proposed $1.9 trillion rescue plan.

Then there's India.

Indian government on Monday proposed a nearly half-a-trillion-dollar budget for the 12 months, beginning April 1 that shows New Delhi is taking a largely conservative tack. Infrastructure and health care spending are set to rise significantly, but the budget also calls for reducing debt.

Overall, spending would rise less than 1% at a time when India is suffering from its worst recession in years while battling the coronavirus. India's economy, once one of the world's fastest growing, is estimated to have shrunk nearly 8% in the current fiscal year, which will end March 31.

"I don't know why the government is so hung up on being fiscally conservative when the whole world is suggesting that this is the time, like no other, to be profligate," said Mahesh Vyas, an economist and the chief executive of the Mumbai-based Center for Monitoring the Indian Economy.

"I don't know any economist suggesting this line of policy," he said.

Even if the government's rosy forecast of 11% growth is realized in 2022, India's net growth would only be 3.5% - far short of what is needed to employ the millions of young people entering the job market each year.

Nirmala Sitharaman, India's finance minister, defended the government's relative frugality on Thursday, saying that the budget was just the latest in a series of public interventions meant to support India's most vulnerable, while also boosting consumer demand and small and medium-size businesses that make up much of the Indian economy.