Budget 2021: India Ratings hopes government will focus on demand-side measures


India Ratings and Research on January 22 said it expects Budget 2021 to focus on resolving the demand-side issues.

India Ratings and Research (Ind-Ra) believes the major focus of the government to revive the COVID-19 battered economy has till now been on the supply side, but it is high time to change gears and focus on the demand side as well, lest the ongoing recovery begins to lose steam, it said.

“There is nothing wrong in addressing the supply-side issues, as it indeed was needed to restore/augment the broken supply chain, especially in an economy where micro, small and medium enterprises play an important role in terms of generating employment and output. However, the absence of adequate demand may jeopardise the recovery and may even lead to a second-round impact,” the agency said.

The economy has lately shown some green shoots, and several high frequency indicators are reaching the pre-COVID level of production, bolstered by a combination of festive season/pent-up demand. However, after two consecutive months of positive growth, a contraction in factory output (Index of Industrial Production) in November 2020 shows the fragility of the ongoing recovery. An appropriate demand-side measure is therefore as important as supply-side measure, it said.

In view of increasing the demand side measures in the upcoming Budget, India Ratings and Research said the government should focus on, “Spending on infrastructure especially that are employment intensive and have a shorter turnaround time andhigher allocation to MGNREGS as it provided a safety net not only to rural households but also to the workers who migrated back to rural areas.”

Creation of development financial institutions on the lines of erstwhile Industrial Credit and Investment Corporation of India Limited, Industrial Development Bank of India and Industrial Finance Corporation of India, who bring in capital. However, such an institution needs to be created in a way that their operations are ringfenced and they function independently, the agency said.

“Mobilisation of higher non-tax revenue, much more than previous years, to fund expenditure.  With equity markets at all-time high, this perhaps is the most opportune time to sell stakes in public entities. Although tax revenue is also expected to increase in FY22 on the back of an economic recovery, the real impetus to revenue receipts of the government can only come from the non-tax revenue,” it said.

Ind-Ra said the government should reprioritise its expenditure by discontinuation of schemes/sub-schemes that have meagre resource allocation and are non-impactful.

“Reprioritisation of both revenue and capital expenditure towards essentials, giving the top priority to mass vaccination/public health. Mass vaccination is important from the point of view that the current crisis did not originate from an economic/financial crisis and/or a natural disaster but is a health/medical issue. Therefore, fixing the health issue would itself fix many of the ongoing economic/financial issues and have a huge cascading effect on the economic recovery,” it said.

Ind Ra said it expects the nominal GDP growth of 14.0 percent and fiscal deficit at 6.2 percent of GDP in FY2022 in view of the budget expectations.