Budget 2021: ‘Superwoman’ Delivers, With ‘Main Hoon Na’ Backstop

‘While experts are probing this dream budget, I’m wondering how this unexpected document was drawn up’: Raghav Bahl

I’ve rarely had the opportunity to begin with a salute to the government, but hey, “no new taxes” is breathtakingly refreshing. Of course, I had been pushing for a heretic policy of tax cuts to kickstart consumption demand, but I knew that was an impossible wish. It was more a doomsday cry to suppress the dread of new levies, to obviate yet another tax-and-spend budget.

But heck, no COVID-19 cess, no wealth tax, no surcharge on the super-rich, no hike in long-term capital gains tax on equities, no nothing! Of course, the bond market has taken it on the chin with a borrow-and-spend budget, but overall, Madam Finance Minister, exceptionally well done. Thank you.

How Was This ‘Dream Budget’ Constructed?

While the experts are parsing the minutiae of this ‘dream budget’, I am thinking about how such an unexpected document must have gotten constructed. Remember, it must have started with the prime minister summoning her and laying out the Do’s and Don’ts. I reckon it must have gone somewhat like this (disclaimer: it’s a fictional account):

PM: I understand that people are dreading new taxes in this budget. I am told that’s the one mistake that could spread doom and gloom and unhinge the economy. But it’s critical to cheer up ordinary citizens, excite the markets, and create a feel-good sentiment. So, this time, no new taxes.

FM (feebly protesting): But sir, how will I raise reve … (but the PM must have cut in sharply before she could complete her sentence).

PM: Please go and talk to all stakeholders. Ask them what they want, what will make them happy and optimistic. Come back to me with that list.

Govt Hasn’t Even Managed To Sell Air India In 5 Years; How Can It Execute Such An Ambitious Budget Plan?

So, the FM called a bunch of meetings — with industry titans, bankers, economists, small business owners, stock market investors, start-ups, labour unions and what not. Her officers furiously noted all the positive asks and compiled a copious list for her. She read it with severe trepidation. How would all of this get implemented? So, to give a balanced view, she inserted cautionary notes spoken by expert naysayers, in italics, and mailed the composite list to the PM:

• Privatise at least two public sector banks and one general insurance company.
• Also sell IDBI Bank.
• Monetise existing roads, railways, and oil/gas pipelines via investment trusts, which should be allowed to issue zero coupon bonds and pick up Foreign Portfolio Investment (FPI) cash. Let’s give them relief on withholding taxes and treaty rates.
• And while we are at it, we should sell old airports and surplus land via SPVs.

But we’ve not been able to sell Air India for half a decade now. Even the profitable BPCL is on hold. Then there is Concor, Pawan Hans, and the LIC IPO hanging fire from the previous year. How can we ever execute such an ambitious agenda?

Increase FDI in insurance to 74 percent and allow foreign companies to control these entities.

Nobody has raised an objection on this one.

• Set up a new Development Finance Institution (DFI) and capitalise it with Rs 20,000 cr.
• Simultaneously, create a bad bank in an ARC/AMC (Asset Reconstruction Company with an Asset Management Company) structure. Government banks will hive off bad loans and wipe the muck from their balance sheets.
• Also infuse at least Rs 20,000 cr to keep these banks solvent even as their books are washed clean.

‘Just Spend, Spend, and Spend’

But a DFI is a failed idea from a State-dominated India of the 70s/80s. Recall how IDBI, IFCI and ICICI had to be scrapped or remodelled. Why repeat the folly? Wouldn’t it be better to create a deep, liquid bond market for very long-term capital? Perhaps set up an intermediary which could function like a market-maker providing two-way quotes, instead of the discredited DFI? And anyway, we had set up NIIF just a few years ago with a similar objective. It’s barely begun to show results. Why not focus more energy there, strengthen it, as opposed to setting up one more entity which could take several years to get going? Remember, we also have to set up the bad bank, which again could take several months to see the light of day. So, instead of getting trapped in setting up new entities, shouldn’t we get more juice out of existing institutions?

• Step up capital expenditure on public projects; don’t baulk if that goes up to Rs 5.54 lakh cr.
• Generously spend over Rs 1 lakh cr each to build roads and railway assets aggressively.
• More than double the healthcare budget to Rs 2.24 lakh cr.
• Just spend, spend, and spend. Don’t worry if you hit a deficit of 9.5 percent this year, and 6.8 percent next year. And don’t be in a hurry to consolidate too soon. Tell the market that you will glide down to 4.5 percent only by 2025-26.

Why We Shouldn’t Forget What Happened When Our Budget Deficit Neared Double Digits Post-2008 Crisis

To do all of this, we would need to borrow aggressively in the market. If we benchmark against the last ‘normal’ year for the economy, this will mean yanking the amount from Rs 4 lakh cr to over Rs 9 lakh cr of net market borrowings! Bond markets could get jittery, with yields going north and private debt getting crowded out. We should also remember what happened the last time our budget deficit got close to double digits after the 2008 crisis. We had blowout inflation and a rash of bad loans. So, would it make sense to consolidate a little quicker than this?

• Reform the direct tax administration.
• Slash the re-opening of past tax returns from six to three years.
• Make the income tax appeals’ process faceless over video conferencing.
• Allow a lenient dispute resolution mechanism for small taxpayers.

Nobody has raised an objection on this one.

The prime minister had a broad smile on his face by the time he finished reading the note. He instructed his finance minster to implement ALL the ideas. He knew that would send a stab of joy through the markets. He also understood that the Indian State does not have the capacity to double down and deliver a fraction of the ambitious commitments in the next financial year. Honestly, it could take several years to get just half the job done. Until then, the public will simply have to keep the faith, as it has in the past, because ‘main hoon na’ (I am there for you).

After all, sab kuchch mumkin hai (it’s all doable).