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The Budget-2021 Series: Pillar 2: Capital & Infrastructure

The COVID-19 shock has not only impacted lives but also livelihoods. Under such circumstances, National budgeting requires skillful maneuvering. The FY 2020-21 witnessed three mini budgets under the Atmanirbhar packages (RBI estimates: 27 lakh crore). The Budget 2021-22 strives to continue the streak. In this analysis, we shall try to make sense of the current state of the Indian economy and budget provisions vis-a-vis Capital (Physical & Financial) and Infrastructure.

The Indian economy has been heading southwards since 2016. COVID-19, being a precipitating factor has further sounded the death knell. Economic indicators reflect the same. A global recession, national lockdowns and trade disruptions, twin economic shocks (supply-demand), stagflation & liquidity trap, a decline in tax-GDP ratio, burgeoning fiscal deficit, rising debt-GDP ratio, stagnated private investments, all these factors have created systemic fissures in the economy demanding a proactive intervention from the state.

Infrastructure forms the skeleton and capital constitutes flesh and blood in an economy. They act as a force multiplier and have been given primacy in this budget (24% annual increase in budgetary outlay and 34.5% in capital expenditure). Over a decade, the Gross Fixed Capital Formation has been declining and this budget tries to reverse the trend. Some of the key features under Pillar 2 can be classified as below.


This sector constitutes about 18% of India's GDP (Asian counterparts like Thailand, S Korea, Taiwan, etc have 30-50% of GDP), 12% of total employment, and a meager 1.4% share in global exports (China: 15%). India's structural anomaly (direct shift from agriculture to services) has been one of the major causes for mediocre performance.

Therefore, to promote the Make in India and Make for the world initiative, Production linked incentive scheme has been launched to strengthen India's manufacturing ecosystem in 13 critical sectors. Besides, the customs duties have been revised to correct the inverted duty structure. Further, the budget envisages Mega Textile Parks to attract investments and boost employment.

India currently hosts the third largest startup ecosystem in the world and is ranked among the top 50 innovative economies (Global Innovation Index). Thus, to enhance the performance, MSMEs have been supported through extensive credit guarantees, equity infusions, and interest subventions. Also, the definition of MSMEs has been changed to widen the net. Moreover, labor codes and land reforms have been ignited to promote ease of doing business.


To achieve a $5 trillion economy, India needs investments of $1.4 trillion in infrastructure (Economic survey 2019-20: ES-2020). Thus, the budget proposes to institutionalize and expand National Infrastructure Pipeline (NIP). Also, sector-wise, some of the key areas of focus are- Roadways (Bharatmala Pariyojana), Railways (Dedicated Freight Corridors and Infrastructure modernization), Ports & Shipping, Energy (National Hydrogen Energy Mission & Gas economy), and Urban infrastructure.

Financial Capital

The banking sector has witnessed turbulent times in the recent past with a broad based decline in credit offtake (from 14.8% in 2019 to 5.1% in 2020) and mounting Non-Performing Assets (NPAs). In the aftermath of COVID-19, RBI's Financial Stability Report indicates a further rise in NPAs to 13.5%-15% of total advances. Besides, freezing of the Insolvency and Bankruptcy mechanism for a year will further impact debt recoveries.

To address some of the issues, Recapitalization of PSBs, setting up of a Bad bank (Asset Reconstruction Company), special insolvency framework for MSMEs, and strengthening the NCLT system have been enlisted in this budget.

To attract investments, a single Securities Markets Code has been envisioned along with the development of a fintech hub at GIFT-IFSC, deepening of the bond market through a permanent institutional framework, and creation of an Investor charter.


The budget has been vocal about Minimum Government, Maximum Governance. Adopting the neoliberal principles of market fundamentalism, the government has been aggressive on strategic disinvestments to ensure competitiveness and fiscal consolidation at the same time.

A new policy for Strategic Disinvestment has been approved. Under this framework, barring strategic sectors, the majority of the CPSEs are to be privatized. Moreover, states are to be incentivized for offloading their stakes. This shall reduce the negative externalities associated with non-core, unproductive public sector assets.

The way ahead

Economic survey 2021 has predicted a "V-shaped recovery" based on certain high-frequency indicators. Real GDP for FY 2021-22 is pegged at 11%. However, to unleash this potential, the survey recommends the classical Keynesian countercyclical fiscal approach which will crowd in private investments, trigger the virtuous growth cycle and ensure debt sustainability. However, fiscal consolidation and deficit financing shall remain a challenge with the debt-GDP ratio likely to spike beyond 90%.

Therefore, to address this, the government has laid down a fiscal glide path to achieve a 4.5% fiscal deficit by FY-2025 from 9.5% in FY-2020. Further, Fifteenth Finance Commission has called for a revision of the FRBM Act to realign targets as per economic realities. Further, to encourage transparency and fiscal prudence, the budget discourages off-budget liabilities.

Concurrently, Monetary policy needs to be aligned with fiscal stance. It was encouraging to see RBI employing unconventional tools viz. Targeted Long Term Repo Operations (TLTRO), Operation Twist, etc and we hope to see similar enthusiasm and proactive measures by RBI.

Moreover, as underlined in the ES-2020, Indian banks are disproportionately small vis-a-vis its economic size. For a fifth-largest economy, India should have at least 6 banks in the global top 100 (currently, India has only one & China, 18). Thus, budget attempts to privatize and consolidate Public Sector Banks.

Furthermore, India is ranked among the top 10 economies by UNCTAD for being a favorable investment destination. Hence, recalibration of capital account convertibility and ease of doing business reforms should be high on the agenda to attract global capital.

Last but not the least, governance and process reforms are the sine qua non. The ES-2020 highlights that Government intervention hurts more. Overregulation leaves ample scope for discretion, corruption, and inefficiencies. The government must extend the hand of trust and let the invisible hand play its own game. Ease of doing business reforms, Digital India initiative & e-Governance, Make in India and Atmanirbhar packages are well equipped to deal with structural issues.

Above all, economic development must be woven around people to ensure a fair and just society. Only then shall we be able to realize collective happiness. It was Adam Smith who asserted that "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable".

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