The article analyses the key features of the Union Budget, including the increase in overall expenditure and jump in capital expenditure in FY22.

Explaining the Rs 4.1 lakh crore jump in expenditure in FY21

• The budget has moved clearly from off-balance-sheet funding [borrowing by FCI and arrears of fertiliser subsidy] to headline-deficit funding.
• That possibly explains the surge in fiscal deficit in the current fiscal at 9.5 per cent of GDP.
• However, by excluding such off-balance-sheet funding, the headline-fiscal deficit declines to 8.6 per cent of GDP. 
• A closer look at the food subsidy, juxtaposed with outstanding FCI liabilities shows that Rs 1.2 lakh crore (0.6 per cent of the GDP) is a pure accounting shift, while the rest Rs 1.9 lakh crore is new spending this fiscal.
• Hence, the incremental spending in FY21 comes to around Rs 2.9 lakh crore (net of Rs 1.2 lakh crore/ 1.5 per cent of the GDP).
• Interestingly, the government has also spent an additional Rs 62,638 crore on fertiliser subsidy, the entire amount of which has been front-loaded.

Focus on capital expenditure in FY22

• Increase in the expenditure in FY22 is noticeable as the pie has decisively shifted towards capital expenditure.
• The budgeted raise in FY22 is 4.6 times larger than the trend increase in the last two decades. 
• The proposed capital expenditure amounts to 3.4 per cent of the GDP if we also include allocation for capital expenditure for autonomous bodies.
• Assuming an Incremental Capital Output Ratio (ICOR) of 4.5, one can expect a GDP growth contribution of 0.8 per cent on account of the capital expenditure.
• The other number in the budget that deserves admiration is the significant decline in extra budgetary resources of the government and PSUs. All this augurs well even for rating agencies if we go by purely fiscal transparency as a rule.

Steps to clean up NPAs in the banking sector

• The most notable development in the financial system is announcement of setting up an Asset Reconstruction Company (ARC) and an Asset Management Company (AMC).
• The approach is to set up an AMC, which in partnership with an ARC, takes over large stressed assets ( approximately Rs 3.5 lakh crore) spread across multiple banks that have a clear potential for turnaround.
• An operational turnaround of the asset creates value for the overall system.
• The AMC/AIF-led approach could enable a move towards true price discovery, consolidating debt into one single entity ensuring faster decision-making, freeing up blocked capital/funds and an operational turnaround of assets.
• A better price discovery could be ensured by having an independent investment committee comprising of senior management professionals.

Increase in FDI limit in insurance sector

• The Union budget also has a proposal to increase the FDI limit in insurance companies to 74 per cent from the present 49 per cent, with Indian management control.
• It is expected that fresh capital will bring a new wave in technical know-how, innovation, and new products to the advantage of consumers, pushing up insurance penetration in the country.
• However, we must ensure that foreign investors become interested in the Indian insurance sector as the current FDI used limit is at 33.8 per cent in private insurers.

Role of RBI

• With the government set for a fiscal push, the baton has passed to the RBI.
• Overall, monetary and fiscal policies need ideal co-ordination for macroeconomic management.
• If the central bank pursues its monetary objectives by not accommodating debt financing in its strategy, the macroeconomic outcome may be worse for both the fiscal and monetary authorities, as well as for the economy.
• Fortunately, the RBI and government have worked in perfect harmony during the pandemic.
• As it continues, we can have a stable interest rate regime which will be rewarding for all, particularly the government.

Conclusion

The Union Budget for FY22 is a budget to consolidate (C), spend (S) and revive (R) and shows that the government is set for fiscal push. Now, the baton has passed to the RBI.

Back2Basics: What Is the Incremental Capital Output Ratio (ICOR)?

• The incremental capital output ratio (ICOR) is a frequently used tool that explains the relationship between the level of investment made in the economy and the consequent increase in the gross domestic product (GDP).
• ICOR indicates the additional unit of capital or investment needed to produce an additional unit of output.

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