View: Making sense of all that Nirmala Sitharaman left untouched in her ‘pro-growth’ Budget


Budget 2021 has deservedly received wide praise for what it has delivered. Equally, it deserves compliments for what it did not do. Given the broader economic context and scenario, GoI had to make two kinds of decisions: what to do and what not to do. The former made the headlines, but equally, the latter reflects GoI’s intent and its likely policy trajectory over the remainder of its term. That is why it is important.

First, GoI did not raise taxes. Where an agri cess was imposed, it was done by reducing the excise and customs duty by an equivalent amount. There were plenty of suggestions from experts that ranged from a Covid cess, to a super-rich tax, to a wealth tax and a tax on unrealised stock market gains. The reasons for additional taxation were not outrageous by any standard. Given the shortage of revenue and the need to spend more, an argument for additional taxation was always on. In addition, the apparent rise in the wealth of those who own financial assets, chiefly equity, during a period of acute hardship for the rest of the economy made the former fair game for an additional tax burden.

In rejecting these arguments, GoI has sent two very clear signals. One, that it believes that reviving growth is the best way to shore up its revenues. Two, that it is not going to penalise wealth creators and the equities-owning middle classes. Rather than dampen their sentiments and animal spirits, it would prefer to see them invest and spend more to aid growth. GoI has conveyed in no unclear terms that its priority is not to be revenue-minded, but production-, investment- and growth-minded.

Second, GoI did not resort to accounting gymnastics and was transparent about the full extent of its fiscal deficit. This puts to an end a decades-old practice of classifying some subsidies, such as food and fuel, as ‘off-budget’. In doing so, GoI has asserted its confidence in running an autonomous fiscal policy and abandoning a ‘fear’ of rating agencies. Indeed, the gradual glidepath to a reduced fiscal deficit — it has committed to reduce it to 4.5% of GDP by 2025-26, which is well above the Fiscal Responsibility and Budget Management (FRBM) Act-prescribed limit of 3% — is precisely what is required in the backdrop of not just the pandemic, but also the slowing growth prior to that.

GoI needs to spend more on investment. That is the pathway to a higher growth trajectory. It would simply not do that spending if it had to stick to the FRBM limit. Ultimately, it is vibrant growth that attracts investor interest and investment, not what the rating agencies decree. Without growth, there will be no investment even if the rating agencies give top marks.

Third, GoI did not draw down the shutters on trade. It could have, given that this was the first budget after the announcement of the Atmanirbhar Bharat initiative. Critics will point to the fact that tariffs were raised for some items, in continuation of hikes in previous years. But this is not protectionism of the old days. Despite hikes, tariffs are very moderate, well below India’s committed bound tariffs at the World Trade Organisation (WTO). Critics need to note that India continues to have free trade agreements with Association of Southeast Asian Nations (Asean), Japan and South Korea, which are among the most competitive manufacturing nations in the world, and from where an entire range of manufactured goods enters at zero or nominal duty.

The hikes in most-favoured nation (MFN) tariffs do not affect imports from these countries that are significant. Along with foreign direct investment (FDI), these imports will keep Indian producers on their toes. To the extent that MFN tariffs affect imports from China, it is good strategy, given the latter’s non-transparent and unfair trade practices. Those crying protectionism should also note how GoI slashed tariffs on a major manufacturing sector, steel, while also removing anti-dumping and countervailing duties signalling that it not a one-way street.

In the years ahead, it would be a good trend if the budget begins to be noticed more for what is unsaid than what is said. For investment and growth, the most important things are certainty and predictability of policy and macroeconomic environment. Tax rates and, indeed, duty rates should be moderate and be stable over the medium term, and fiscal strategy should be drawn up for several years in advance.

Of course, if there are positive windfalls or negative shocks, some adjustments may be required. But as GoI has shown, even in tough times, leaving certain things untouched is the right way.

The writer is chief economist, Vedanta

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