How Union Budget 2021 Plans To Take India Out Of Pandemic

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COVID budget

It is well known that the Covid-19 pandemic resulted in the Indian economy contracting by over 7% in the current financial year.
Contrast this to the fact that the average annual rate of growth since the start of economic reforms in the early 1990s was around 7%.
A sharp contraction of the economy, which came after three successive years of deceleration in GDP growth, dealt a heavy blow to the government’s finances.
In the current financial year, the fiscal deficit, which is a measure of how much the government has to borrow in order to plug the gap between its revenues and expenses, jumped from a budgeted 3.5% (of the GDP) to 9.5%.

The Fiscal Responsibility and Budget Management (FRBM) Act requires India to reduce the fiscal deficit to just 3%.
The Union government will not only fail to achieve this goal this year or the next (when it would be 6.8%), but will not meet it until 2025-26 — one year past the term of the current government.
In other words, government finances have been bent out of shape not just for this year but for the coming five years, thanks to the disruption caused by Covid-19.
And this matters because, at the start of 2020, when all other engines that drive domestic economic growth — private consumption, business investments, and exports — were faltering,
It was expected that government spending would kick-start the Indian economy.
But because of the pandemic, the government’s ability to spend has been severely affected.
That’s because in the current financial year, as economic activity evaporated, its revenues collapsed, while the need to provide free food and other subsidies sky-rocketed.

There are two broad ways in which the government can boost growth. One is to cut taxes — for the common man and/or for companies.
A tax cut leaves individuals with more money to spend and boost economic activity.
A tax cut for companies leaves them with more profits that they may think of re-investing in the economy, and thus boost economic activity (read GDP).
But in the past couple of years, the government has already provided a historic cut in corporate tax rate — making it one of the lowest in the world.
For individuals, too, there have been several relief measures.
Moreover, as the two-and-a-half-times increase in borrowings shows, the government simply cannot cut taxes of any kind anymore.

The second way to boost growth is for the government to spend more.
Doing so means the government leaves people and companies with more money, and that in turn boosts economic activity.
But the resource crunch also meant there was very little room for the government spend its way to a recovery.
At first glance, the key strategy employed by the government seems to be to switch the nature of its expenditure.
In other words, starting next year, it wants to switch towards increasing capital expenditure relative to its revenue expenditure.
Capital expenditure essentially implies spending on creating productive assets such as roads, while revenue expenditure refers to the government’s day- to-day spending, such as salaries.

As such, while the total expenditure in 2021-22 is pegged at Rs 34,83,236 crore against Rs 34,50,305 in 2020-21,
Revenue expenditure in 2021-22 is budgeted at Rs 29,92,000 crore, which is almost 3% less than the current year.
On the other hand, capital expenditure in the next year is budgeted to be Rs 5,54,236 crore — 26% more than this year.
This is the most significant takeaway from this year’s Budget because more often than not, governments — even this one in the past — tend to sacrifice capital expenditure in favour of revenue expenditure.
Choosing capital expenditure might appear like a unsympathetic choice — because it does not involve money to be handed over directly to the needy.
Instead, it is investment into raising the productive capacity in the economy, which is the best chance India has to return to a path of sustainable economic growth.

There were two sectors of the economy that were perhaps most grievously hurt due to the Covid-19 disruption.
The first was healthcare as it became clear that there is no alternative to having a robust public provisioning and that the existing
Budget expenditure on this is woefully inadequate.
The second was education, as lockdowns and the shift to online education brought out the deep digital divide in the country.
Most Indian students did not have access to the Internet and/or a computer and suffered as a result.

In her Budget speech, Finance Minister Nirmala Sitharaman asserted that health, education, and inclusive development were central to her expenditure agenda.
However, on all three counts, the actual outgo falls short.
For instance, the Finance Minister said the health allocation for 2021-22 has gone up by 137%.

Professor of Ambedkar University argued that,
The Finance Minister has included the one-time expenditure for Covid-19 vaccination of Rs 35,000 crore, as well as Finance Commission grants for water and sanitation (which effectively go to the state governments) in the health allocation.

On education, the Finance Minister announced plans for improving the existing schools under the New Education Policy as well as beefing up the facilities for tribal students in the Eklavya model residential schools.
But in terms of allocation, it was slashed to ₹93,224 crores from ₹99,311 crores in 2020-21.

Q) With reference to Balance of Payments, which of the following constitutes/constitute the Current Account?