RBI’s recent monetary policy committee draws much attention to the government’s capital formation initiative. Initiatives to increase financial savings with easing of FDI norms will boost both domestic and foreign investments. This has also been done by allowing retail investors to invest in the government securities, leading to the much needed movement of savings to the government sector and allowing government much needed funds to finance fiscal deficit.
The main drivers of growth — investment and consumption — remained weak at the backdrop of the pandemic. government’s counter cyclical budget to boost growth and investment gives much needed push for capital formation. This approach of a strong expansionary fiscal policy is welcomed and much needed. The government has made a huge shift in favor of capital expenditure amounting to Rs. 4.12 lakh crore. In 2020-21 , capital expenditure is expected to increase by 18.1%. There has been as significantly higher allocation to health infrastructure amounting to Rs. 69,000 crore under ‘ayushman bharat’.
This would lead to an overall increase in expenditure by 26% y-o-y over FY 21. This has seen a strategic increase of 36% from FY 20. As a matter of fact, government capex as a percentage of GDP has risen to the highest levels in 17 years. This gives an affirmative indication towards strong capital formation in economy.
The budget also makes tax exception provisions in real estate, the tax holiday for affordable housing projects and tax deduction for interest on housing loans have been extended. This certain push for sectors with a high potential to act as a credit multiplier on growth is commendable.
The question that now arises is how will the government finance all the ambitious projects it wants to undertake? the government has already indicated in the budget that the fiscal deficit for FY22 would stand at a significant 6.8%. moreover, it has also mentioned an adoption for a path that would mean the expansionary fiscal policy would be multi-year and continue till FY25-26.
The RBI has kept the repo rate low and unchanged, providing much needed stimulus. Moreover, if the government hasn’t provided relief for the taxpayers with no change in tax slabs, it certainly hasn’t made any changes for major increase in taxes. Clearly, there is a viewpoint that prevails that buoyancy in tax revenues through growth will meet some of this funding need. But the budget presents some more innovative and fiscally stimulative plans.
For one, there is the creation of DFIs (development finance institutions) for infrastructure financing to provide long term loans. DFIs in India in recent past were used to finance projects that had long gestation periods and the projects the banks didn’t want to finance. This comes especially after both IDBI and ICICI (both were DFIs) were converted to commercial banks. This certainly points towards government’s possible effort to provide easy long term financing opportunities in the economy.
In another major initiative, the ARC and AMC model will be used to clean the bad book of banks. This is projected to help in declogging the financial system and give a strong impetus to credit growth, which would be required to fund the economy.
Furthermore, the National Monetization Pipeline of brownfield infrastructure assets and Asset Monetization dashboard are excellent expansionary initiatives to monetize operating public infrastructure. The government has also made provisions for disinvestment that will amount to ₹1.75 lakh crore. The plan to privatize two public sector banks and one general insurance company (LIC) will help the government to raise resources and improve capital allocation or formation in the economy.
Thus, the well thought out budget has the potential to drive growth by giving the much needed push to the capital formation.