Let me begin with a worthy quote of the Prime Minister Narendra Modi. Just a few days before the presentation of the Budget 21 on Monday, the prime minister stated that the national Budget would be a continuation of the “mini budgets” that were announced by the government in 2020 to help revive sectors reeling under the impact of the Covid-19 pandemic.
“This has probably happened for the first time in the history of India that 4-5 mini budgets were presented in 2020. It was a year of mini budgets and this (Budget presentation) will be seen in sequence of those mini budgets,” he said last Friday while referring to the Rs.20 lakh crore economic stimulus package that was announced in five tranches in May as part of the Atmanirbhar Bharat Abhiyan.
Now the cat is out of bag. Finance Minister Nirmala Sitharaman on Monday unveiled the much-hyped ‘never seen-before’ Budget 2021. So, everybody is currently engaged in Budget announcements. This is the time when most people, whether they fully comprehend the budget structure or not, spent good time on analyzing pros and cons of the budget. A quick glance at the presentation of budgets in the past, be it a central budget or a state budget, suggests that the way budgets are drafted and presented and the kind of response that follows has reduced it simply to a customary activity. We hardly see an analyst or an expert contended with the structure of budgets. The fact is that budget is always loaded with few concessions and some burdens. Mostly, the concessions drafted on paper when put into action automatically succumb to the load of burdens. And the net result is always a burden on common people. Needless to mention, uncontrolled rising cost of living eats up all concessions on ground, leaving most of the budget estimates and protections haywire.
After the twin onslaught of coronavirus on human habitation and the economy, the economic supply chains got disrupted. This forced a grinding halt in the economic activities for almost a year. Millions of people in different sectors of economy were rendered jobless and millions, who survived to stick to their jobs, witnessed drastic cut in their perks. And millions of people saw their savings dwindling drastically to survive joblessness amid the pandemic. Overall, spending took a major hit that sparked huge concern for the economy.
Presenting a budget in such unprecedented circumstances is always challenging. Up to what extent the Budget 21 presented by the finance minister Nirmala Sitharaman has met these challenges, especially the Covid-induced challenges, cannot be gauged right now as thorough combing of the announcements would take some time. Notably, the Budget contains a massive spending plan, which would be met partly from enhanced borrowings, to pull the economy out of the trough.
However, a quick glance suggests that it’s a budget that has resisted fine tuning of taxes with sole focus of reviving growth. Even as initiatives aimed at the revival of growth are need of the hour for the kind of huge damage caused to all sectors of economy by the covid-induced lockdowns, it has been done at the cost of fiscal discipline. The Budget 2021 drives the fiscal deficit to swell to a much higher-than-expected 9.5% in the current fiscal on the added expenditures. The ballooning of the fiscal deficit is against the widely predicted 7%.
With focus on growth, the Budget announcements gave a reason to the market players to cheer up, hoping for an economic revival. Absence of new taxes on the wealthy and corporations too added to their pleasure. However, bond market tumbled on worries about the record deficit.
Most of the stock market experts called the Budget 2021 as ‘thoughtful, unique and better than expectations’. With no change in direct taxes, capital gains taxes, or any form of Covid tax the markets cheered. Otherwise, last week the markets witnessed heavy selling in the backdrop of apprehensions that Budget 2021 announcements would trigger major changes in tax structure. The markets experts even picked the focus on disinvestment, increased FDI exposure for the insurance sector, and a cleanup plan for stressed assets among other things as confidence-boosting measures.
However, while combing quickly through some of the budget announcements, the recapitalisation of banks has been pegged as essential for a dash for growth, which requires a lending spurt. The Budget rolled out a proposal to set up a company (bank bank) to manage banks’ bad loans, which are expected to reach record levels this year and threaten the financial stability of the country. The bad bank will hold stressed assets — bad loans, restructured debt and advances to companies that can’t service their debt — which can be sold on to investors at a reduced price, Finance Minister Nirmala Sitharaman disclosed in her Budget speech.
The proposal envisages a bad bank would NPAs off the books of banks that will provide immediate relief to the banks.
With the situation getting murkier for the banks in coming times, of course, it makes a sense for them to find out ways and means to clean their balance sheets of rotten loan portfolio to absorb the inevitable shock of another spell of bad loans which is on cards. In the context of carving out a process of cleaning their books, the concept of bad bank has been making frequent rounds for the last three years.
Even as there are other channels to deal with the bad loans like Asset Reconstruction Companies and the Insolvency and Bankruptcy Code (IBC) framework, the idea of bad bank got support from the former RBI governor Duvvuri Subbarao.
Globally speaking, there are cases of bad banks which failed in achieving the basic purpose. It was in 1999, when China set up four state-controlled AMCs — Cinda, Huarong, Great Wall and Orient — to mop up bad loans from the country’s ailing banks. In 2012, after teetering on the brink of a payments crisis, Spain set up a bad bank — Sareb — to take over about €50 billion worth of property and loan assets from the country’s ailing banks, with the intention of turning the loans around. But while the bad banks of China and Spain have helped take doubtful assets off the banks’ hands, they themselves haven’t succeeded in fully restructuring these assets or making money off them. China’s AMCs have found restructuring not so lucrative, and have ventured into lending and investing in foreign bonds for profits. Spain’s Sareb has remained a loss-making entity from the word go.
So, while looking at the success of bad banks in the global arena, the idea of establishing such a bad bank here in the country raises question marks. We have asset reconstructions companies in place and they too are in the business of buying bad loan from the banks. Isn’t it better to strengthen the system governing functioning of ARCs rather than toying with the idea of establishing a bad bank?
Meanwhile, we didn’t find any major proposal/s to address the Covid-induced job losses. An exclusive fund such as venture capital fund to finance employment could have made sense to trigger employment generation at large scale. Unemployment in the country has reached 9.1% in December and 85 million people are estimated to have fallen into the ranks of the newly poor, particularly migrant workers who returned to villages.
Normally unemployment issues are tackled in Plans and not in budget. But in unprecedented Covid crisis situation, some innovations merits consideration to address to the unemployment. We all know, avenues of financing self-employment are based on the normal route of banking. Since banks are commercial institutions, financing is not done without collaterals or mortgages. It is also a fact that 2-3 years are required to create an industry and scale of finance at most of the times does not meet the actual requirements of the unit. So in this backdrop, an innovative scheme with a venture capital fund for employment with no interest to be charged from the beneficiaries of this fund makes a sense in the given circumstances.
Lastly, the statement of the prime minister about mini-budgets holds ground. Why not to explore the innovation and have biannual or quarterly budgets instead of a yearly budget? Will this idea be part of new norms scripted by coronavirus? Nothing is impossible.
(The views are of the author & not the institution he works for)