Since India gained independence in 1947, the country has been making great strides towards achieving economic autonomy, and during the course of more than 70 years, the country has been able to shed its colonial past and has paved the way to become an economic powerhouse. The most important ingredient for this progress, however, not as much as China in the neighbourhood, is the role played by the Union Budget. Indian Union budget reflects from the very beginning and more so in the post 2014 period a decisive framework that was architectured to introduce policies and reforms in an open and transparent way unlike in a totalitarian state like China.
History of Union Budgets in India
Finance minister RK Shanmukham Chetty presented the first budget of Independent India in 1947. Total expenditure under the budget was Rs 197.39 crore, out of which approximately Rs 92.74 crore (or 46 percent) was allocated for Defence Services. In 1948 he used the term “Interim Budget.” The Interim Budget later became an institutional process, for each year the General Elections are held. Primarily, an Interim budget denotes a short-term budget, which is presented just before the Lok Sabha elections are held. It was during his presenting the budget in 1949 that he first used the term “Union Budget”. Under this budget, the government decided to abolish the Capital Gains Tax. Which was again reinstated under the budget 1956-57 and continues to serve as an entity closely monitored by the income tax authorities to prevent any tax evasion.
The inception of the Planning Commission was done in the budget of 1950-51 which became a key body headed by the Prime Minister which over the years formulated the Five-Year Plans and directed the well-defined programs for the Country’s development. The various highlights of the same since 1952 to the Union Budget 2013 by Finance Minister P C Chidambaram ranged from introducing double surcharge (1951-52) to raising the minimum income tax exemption limits (1953-54) introduction of wealth tax (1957-58) which continued to exist for the next six decades. The budget of 1958-59 was for the first and last time was presented by the then Prime Minister of India and not by the Finance Minister. Prime Minister Nehru in this historic budget introduced a new tax called the Gift Tax. It was during the 1962-63 that the tax payers paid the highest income tax which stood at 72.5% excluding surcharge[i].
Finance Minister Nirmala Sitharaman’s Union Budget of 2019-20, was the first introduction of several intuitive reforms such as more relaxed taxation norms, faceless e-assessment, and direct tax reforms. However, her Union Budget 2021-22, presented after the crippling effects of COVID-19 Pandemic is nothing short of revolutionary. As Vaidyanathan Iyer stated that the Budget “was bold, and offers not only a direction for growth but also a strong intent for reforms. Thankfully, it doesn’t have a spoiler.” The ten takeaways quoted are listed as under[ii]
- An Expenditure Budget:Finance Minister Nirmala Sitharaman has found space for imparting a fiscal impulse in 2021-22. Compared with a capex of Rs 4.12 lakh crore in Revised Estimate (RE) of 2020-21, she has hiked it 34.46 per cent to Rs 5.54 lakh crore in 2021-22.
- A Reform Signal:Two public-sector banks and one state-owned general insurance company to be lined up for disinvestment. FDI in insurance to be hiked to 74% from 49% now. LIC IPO.
- 3.No Populism, But Focus on Growth:Despite being a tough year for the aam admi, the FM has avoided giving any income tax relief. No increase in standard deduction, no raise in the tax slabs.
- Health Gets Its Due:In a year when the world was ravaged by the Covid-19 pandemic, FM gives health the attention it merited. Health allocation jumped 137% to Rs 2,23,846 crore in 2021-22 compared with Rs 94,452 crore in 2020-21. She provided Rs 35,000 crore for the Covid-19 vaccine, and promised to provide further funds, if required.
- Bad Bank– A Good Idea: After dithering for almost six years, the government has finally decided to set up an asset reconstruction company that will take over the bad loans of banks, giving them flexibility to finance the economic recovery.
- Development Finance Institutions (DFI) Reborn:The idea was dead with most earlier DFIs including IDBI and ICICI turning into banks. To provide debt to long gestation projects, a new DFI with a capital of Rs 20,000 crore. It will have statutory backing, but will be professionally managed. Lending portfolio of Rs 5 lakh crore within three years.
- Asset Monetisation – Will it Gather Pace:This is an ongoing exercise, where the government hasnt done much to inspire confidence. National Monetisation Pipeline of potential assets of NHAI, PGCIL, Railways, airports, warehouses, sports stadiums.
- Eye on Elections – Not Unexpected:Four poll-bound states get major highway projects: Tamil Nadu (3,500 km – Rs 1.03 lakh crore), Kerala (1,100 km – Rs 65,000 crore), West Bengal (675 km – Rs 25,000 crore) and Assam (1,300 km – Rs 34,000 crore).
- Strategic Disinvestment – Again, Needs Political/ Bureaucratic Push:NITI Aayog asked to short list non-core PSUs for strategic sale. After a poor show in 2020-21, the government has estimated disinvestment receipts at Rs 1,75,000 crore.
- Growth Vs Prudence – Tilting Towards Growth:Fiscal deficit estimated at 6.8 per cent of GDP in 2021-22; it is estimated to touch 9.5% in 2020-21. It will be brought down to 4.5 per cent of GDP by 2025-26.
What the Budget Proposals are Attempting to Do[iii]
Anil Sasi writing in the post budget analysis makes an important contribution to explain how the Finance Minister has attempted to propose new measures in the midst of the pandemic to kick start the flagging economy and more essentially to boost spending across various sector. The points he has covered needs to be reproduced here as under:
- 1. Production-linked incentive (PLI) scheme push: The government aims to spend Rs 1.97 lakh crore on various PLI schemesover the next five years, starting this fiscal. This is in addition to the Rs 40,951 crore announced for the PLI for electronic manufacturing schemes.
Why the move: It is likely to attract global players in the Indian manufacturing sector as the government is planning to offer plug-and-play infrastructure to the companies willing to come to India.
- Health push
The government has announced a new central healthcare scheme to strengthen the country’s healthcare infrastructure over the next six years. The Pradhan Mantri Atma Nirbhar Swasthya Bharat Yojana, which will operate in addition to the existing National Health Mission, has been allocated around Rs 64,180 crore.
- 3. Why the move:This scheme is expected to be used to develop capacities of primary, secondary and tertiary healthcare systems as well as existing national institutions over a period of six years, according to Sitharaman.
In addition to this, it would be used towards creating new institutions to cater to the detection and cure of new and emerging diseases. During her budget speech, the minister said that investment on health in this budget has increased “substantially”, with a focus on strengthening preventive care, curative and well-being of the population.
- Power push
The government has decided to create a framework to give consumers alternatives to choose from more than one power distribution company.
Why the move: It is aimed at offering competition at operator level and more choice to consumers. Targets better efficiency levels in the distribution sector
- Divestment push and Bad bank proposal
Strategic disinvestment of companies, including BPCL, Air India, Pawan Hans, IDBI Bank, Container Corporation of India, to be completed in 2021-22. Government to ask Niti Aayog to start working on identifying the next list of companies for strategic sale.
Announcing its version of the bad bank[iv] proposal, the government will set up an Asset Reconstruction and Management Company for Stressed Assets to take over bad loans. Alongside, a Rs 20,000-crore equity infusion has been announced for public sector banks.
The FM said it will take up strategic sale of two public sector banks and one general insurance company along with completing the sale of BPCL, Concor, SCI, IDBI and BEML among others in 2021-22.
Why the move: These measures are expected to strengthen the state-owned banks and hasten the process of clean up of their balance sheet. The divestments will help raise revenue for the government and is expected to improve efficiency and provide momentum to privatisation.
It’s more about the principle of separating the good from the bad. It’s about not wasting more good money on bad assets. Former RBI Deputy Governor Viral Acharya has in the past stressed on the need to separate the ‘good’ from the ‘bad’, and to set up a bad bank.
The government has been toying for far too long with the idea of a National Asset Reconstruction Company that can hold the bad assets of all state-owned banks. The proposal has gone around in circles between the Finance Ministry, the Niti Aayog and the Prime Minister’s Office. Spooked by Opposition politics earlier, Modi had shied away from being labelled as being pro-corporate. This proposal marks a departure. After almost 70 years since being in power, the BJP-led government has finally taken a call on setting up a Big Bad Bank. Finance Minister Nirmala Sitharaman has announced a new asset reconstruction company and an asset management company to take care of the bad assets of banks, and equip the banks to lend to productive sectors as the economy starts recovering.
- Why it requires Govt involvement:There are many mechanisms to proceed with how to realise value from the NARC. Though India has over a dozen private ARCs, no state-owned banker in the current environment will be courageous enough to sell his bad assets to these at a discount, for fear of prosecution by state investigative agencies at a later date. And private ARCs will ask for a massive haircut from banks. It’s here that a national ARC can inspire confidence amongst banks.
- FDI limit hiked in insurance
The Finance Minister announced to hike the FDI limit in Insurance from 49% to 74%. She, however, said that majority directors on board and Key management personnel will be Indians.
Why the move: The move will help increase capital inflow in insurance companies and enhance their expansion and growth.
Development Financial Institution reborn
Given that there is a lack of finance for infrastructure and long gestation projects, Finance Minister Nirmala Sitharaman has announced the setting up of a Development Financial Institution (DFI). The DFI will have statutory backing and Rs 27,000 crore capital.
To differentiate it from DFIs that existed in the past, she said the DFI will be professionally managed.
What will be its focus?
The proposed DFI will be used to finance both social and economic infrastructure projects identified under the National Infrastructure Pipeline (NIP), according to finance ministry sources.
- Scrapping policy
The government has introduced the scrapping policy to remove unfit vehicles on a voluntary basis. All private vehicles beyond 20 years and commercial vehicles older than 15 years old will have to undergo a fitness test.
Why the move: The proposal is expected to offer a boost to the auto sector, both for commercial and private vehicles. Auto shares surged after the announcement.
- Bad debt resolution
The government plans to further strengthen the NCLT framework and continue with the e-court system for faster resolution of bad debts. A separate framework for MSMEs will also be made by the government.
Why the move: With the government-imposed moratorium on admission of new cases likely to end by March 31, a number of MSMEs, which have not been able to earn enough during the fiscal are likely to be taken to insolvency by their creditors. The separate framework may help MSME owners avoid losing their company while continuing to pay the debt.
- Gas transport
The government has announced an independent gas transport system operator for booking and coordination to ensure for unbiased allocation of natural gas transportation capacity.
Why the move: The government aims to address concerns of bias in the allocation of gas transportation capacity by players such as GAIL involved in both the supply and transportation of natural gas.
- Ujjawala push
The government has announced the extension of benefits of the Ujjawala scheme to an additional 1 crore people.
Why the move: The scheme, which provides LPG connections with financial assistance from the central government and currently benefits 12 crore households, will be extended further to provide clean cheap cooking fuel.
- Power sector push
The government has allocated close to Rs 3.60 lakh crore in the Budget towards launching a “revamped”, reforms-based, result-linked power distribution sector scheme.
A framework will also be put in place to give consumers alternatives to choose from more than one distribution company.
Why the move: This comes amid “serious” concerns over the viability of power distribution companies (discoms) in the country. The scheme is expected to provide assistance to discoms for infrastructure creation tied to financial improvements, including prepaid smart metering, feeder separation and upgradation of systems, said Finance Minister Nirmala Sitharaman.
Discoms across the country are monopolies, whether government or private, said the minister. There is a need to provide a choice to the consumer, she said.
The past six years have seen a “number” of reforms and achievements in the country’s power sector, including the addition of 139 GW of installed capacity, the connection of an additional 2.8 crore houses and addition of 1.41 lakh circuit kilometres of transmission lines.
- Social security net for gig workers
Social security benefits will be extended to gig and platform workers, the finance minister said. Minimum wages will apply to all categories of workers and will be covered under ESIC.
This will impact around 15 million gig workers in India, in addition to online platform providers across sectors such as transportation (Uber and Ola), food delivery (Swiggy and Zomato), and the contract workers in IT and software firms.
Importance: The economic survey had noted that India has become one of the largest markets for flexi-staffing in the world due to the wider adoption of e-commerce and online retailing. It had also said that the increasing role of the gig economy was evident through the significant growth of online retail businesses during the lockdown caused by Covid-19 pandemic.
- Fiscal deficit
India’s fiscal deficit is set to jump to 9.5 per cent of Gross Domestic Product (GDP) in 2020-21, according to the revised estimates presented by the finance minister today. This is sharply higher than 3.5 per cent of GDP that was projected in the budget estimates. Slump in government revenues amid the Covid-19 pandemic has led to sharp rise in deficit and market borrowing.
The government plans to borrow another Rs 80,000 crore to fund the deficit this year. Gross market borrowings for next year has been pegged at Rs 12 lakh crore. A new roadmap for fiscal consolidation has been announced in the budget.
- Pension relief
The government has given relief measures for senior citizens by removing the need to file income tax returns for those aged over 75 years.
It has also announced a halving of the time frame for reopening of income-tax assessment cases from 6 years to 3 years. For reopening of serious tax evasion cases up to 10 years, the government has put in a monetary limit of cases involving over Rs 50 lakh in a year.
This is expected to reduce instances of tax harassment of income taxpayers.
Critical Observations
In the above pages we have enumerated and incorporated the history of the Union Budget of India since independence to the present time, elaborated and quoted some of the writings related to the major takeaway from the Budget presented for 2021-22, explanation as to why and what the Budget planned to do. Considering the intent of the Government of India to take steps to push India in amongst the top five economies of the world, it is necessary to understand that for that intent to become a reality, we have to identify the three main verticals which will allow India to reach that status. The three main pillars are:
- Security
- Infrastructure
- Education
A strong and an invincible SECURITY architecture assisted by a strong Infrastructure and supported by quality Education is necessary to securitise all he ten takeaways as enumerated above. A nation state in the 21st century requires to achieve a credible SECURITY beyond Defence to become truly a world leader. Hence the problems of national security which is the integral part of the totality of SECURITY for a country like ours which has seen a series of catastrophes from within its recent past and continuing threat from without has to be formulated in terms of the larger goals and aspirations to which this civilizational community has committed itself. Briefly we can think of three such objectives:
- National stability and Integrity
- Social, Political and Economic progress
- Peace and Stability in our relations to other states.
The problems of national security must be seen in terms of these larger goals. If this may be called the cultural dimension of the problem of national security, we have to look at the problem from the political perspectives as well. Here we have to consider a complex interaction between our perception of our neighbours beyond the border as well as the larger major powers and their perception and assessment of our situation and our objectives. It is within this matrix of relationship that specific goals of our SECURITY policy will get structured. The cultural and the political aspects of the problem create a texture of tasks and priorities of decision making and possible options for actions. The actualization of our objectives as modulated and structured require an adequate process of institutionalization ranging from the economic to the administrative and legal preconditions. This institutionalization of our SECURITY efforts themselves create further problems and difficulties. Hence all the three dimensions viz., the cultural, socio-political and institutional enter in a complex interaction calling for skills and patterns of leadership to securitise the SECURITY of our nation. To achieve the same, we need to understand and commit to strengthen our national security architecture supported by the Union Budget. It needs to be emphasised that present allocation related to Defence budget 2021-22 is grossly inadequate. I have noted in the beginning of this paper that in 1947, the Union Budget had allocated 46 percent of the total budget for Defence. With the recent happenings in Eastern Ladakh, and a serious collusion between our two neighbours, a two front war scenario a distinct possibility, the Union Budget has no other options to allocate adequate financial outlays for Defence and national security when our northern neighbour is officially spending nearly three and a half time more than India’s 2021 defence budget.
On the issue if infrastructure, it must be emphasised that the Make in India policy, strengthening the hands of the Private Sector with a revolving door policy where the best of manpower in every field should be able transit between the Government and the non-government sectors must be prioritised. The private sector must be able to lend their expertise, change the mind set existing within the personnel of the Government agencies and remove what the Prime Minister has hinted very recently the need to unshackle the Indian bureaucratic hold on every decision-making platform. I believe that the Union Budget has a very specific role to play by handholding the private sector by investing financially through a fiscal policy in every form of non-governmental body, institution and organisation to leapfrog and reduce the tremendous asymmetry that has developed between us and our northern neighbour in the past thirty years.
Lastly, the architecture of Education policy has to commensurate with the needs of India in the 21st Century. The New Education Policy is less of a policy document and more an enumeration of a method to make Research and Teaching more accountable if possible. It is good if the Research Council will have a budget of 20,000 crores over and above the existing funding available to the UGC, DBT, DST etc. However, it has at least increased a little, the percentage of GDP and therefore the first Baby Step towards Education per se. It is essential to quote what Arvind Panagariya and B Vekkatesh Kumar[v] critically wrote on the New Education Policy as follows:
“But the recommendation by the draft NEP that a National Higher Education Regulatory Authority of India be all-encompassing and, additionally, subsume the functions of many professional regulatory bodies such as the Bar Council of India and the erstwhile Medical Council of India (MCI), runs the risk of becoming overly contentious with the reform getting stalled altogether. It will be best to let the reform in these areas proceed on separate tracks along the lines of the National Medical Commission Bill, which would replace the MCI Act and is soon to be reintroduced in Lok Sabha.”
Once again, the Budget allocation for Education in the present budget is far away from the requirement of allocating 6% of the GDP.
Conclusion
In this article, we have recognised the path breaking and almost revolutionary approach to craft the Union Budget 2021-22 by the Finance Minister. It is people centric with a very appreciable effort to balance the fiscal policy towards the developmental goals. India is transiting through an unchartered path while still groping with the COVID-19 pandemic. The efforts of increasing health security measures due to the pandemic by 140% is an un believable effort by all counts. However, India has no other options but to pay utmost attention to the three pillars comprising of SECURITY, Infrastructure and Education.
Author Brief Bio: Professor Gautam Sen was Formerly Sawarkar Professor of Strategic Studies (1981-2007), Head Department of Defence Studies (1981-2001), Director Board of Colleges & University Development (2001-2004) Director National Centre of International Security and Defence Analysis (2002-2007) at the University of Pune. He was Director General and Member Board of Trustees, Indian Institute of Education, Pune (2006-2011), Research Professor National Security Council Secretariat, GoI, Delhi (2015-16). He has been a Visiting Professor at Madras University, Gujrat Vidyapith, Goa University, Institute of Social and Economic Change and UGC Visiting Professor at Gorakhpur University. Air Marshal Subroto Mukherjee Chair of Excellence, United Services Institution, Delhi (2018-19). Sen has also been a FORD FOUNDATION International Fellow at Harvard and Massachusetts Institute of Technology and Twice Fellow at the International Institute of Strategic Studies (IISS), London.
[i] History of Union Budget in India,
https://www.maxlifeinsurance.com/blog/term-insurance/history-of-union-budgets-in-india
[ii] P. Vaidyanathan Iyer, “Union Budget 2021 Explained: The 10 biggest takeaways”, Indian Express, https://indianexpress.com/article/explained/explained-the-10-big-budget-takeaways-7169967/, 15 February 2021
[iii] Anil Sasi, P Vaidyanathan Iyer, Sandeep Singh, Harish Damodaran, “What top Budget 2021 proposals are trying to do”, Indian Express, https://indianexpress.com/article/explained/explained-what-top-budget-2021-proposals-are-trying-to-do-7169789/ , 03 February 2021
[iv] Sunny Verma & George Mathew, “Explained: The arguments for and against a bad bank”, Indian Express, https://indianexpress.com/article/explained/npa-bad-bank-balance-sheet-loan-rbi-shaktikanta-das-7151841/, 22 January 2021
[v] Arvind Panagariya & B Venkatesh Kumar, “Sharpen Educational Tools”, The Economic Times, https://economictimes.indiatimes.com/blogs/et-commentary/sharpen-educational-tools/ , 02 July 2019
