Mapping The Growth Route
Forbes India|January 29, 2021
Reviving the economy through capital spending should be top priority; fiscal consolidation will have to wait
SALIL PANCHAL & SAMAR SRIVASTAVA

As the impact of the pandemic recedes, Budget FY22 has its task cut out: Get growth back on track while laying out a roadmap to address a dire fiscal situation. It’s a fine balance that the government needs to get right. While at the very least it would set the course for the next 12 months, industry would also be looking to the Budget for clues for medium term policymaking for, say, the next five years.

As things stand, a sharp decline in revenue has prompted the government to meet the deficit through borrowings. In the financial year ending March 2022, the fiscal deficit for the central government is expected to touch 7 percent of GDP as compared to a planned 3.5 percent when Budget 2021 was presented. Add an additional 5 percent for the states as well as off balance sheet borrowing and the number gets to 13 percent of GDP.

According to economists, the key to reviving growth is government spending on capital assets that would have a multiplier effect on business economy. Roads, railways, ports and irrigation systems would boost output and get economic activity going. “You cannot consolidate on the basis of expenditure reduction. Instead spend more and use the multiplier effect of that to get higher tax collections,” says Abheek Baru, chief economist at HDFC Bank.

NEEDED: AGGRESSIVE DISINVESTMENT

Mopping up resources would be a key priority for FY22. One way to get money into government coffers is a robust disinvestment programme. While strategic company sales have been on the agenda for years, they take time and are often difficult to execute if markets dip. Going for a trigger price-based mechanism, where assets are identified and disposed of piecemeal once a certain stock price is hit, could be one way to go. Interested parties can then mop up shares from the open market as and when they become available.

While the intention is strong, the ground reality facing Minister of Finance Nirmala Sitharaman is a tricky one. The government may not be able to complete the Bharat Petroleum and Air India disinvestments in the current financial year. There are more disinvestments planned such as Shipping Corporation of India and BEML, but there is no clarity on the time-frame within which they can be completed. But there could be no better time than now.

The Life Insurance Corporation (LIC) initial public offering is emerging as the most-awaited event of 2021, but with amendments to the LIC Act required—and Milliman Advisors recently appointed to determine the embedded value of the financial institution—there is no clarity on when it could take place.

The Worst Hit

Aviation: Airline operations in India—like all international carriers—were among the hardest hit by the pandemic, as international borders/routes remained largely closed and domestic travel subdued through much of 2020. Indigo, SpiceJet and Air India reported quarterly losses and a slump in revenues. Indigo’s revenues from operations fell by 91 percent year-on-year to ₹766.7 crore in Q1FY21, and 66.2 percent down year-on-year to ₹2,741 crore in Q2FY21. In the same period, SpiceJet’s revenues slumped by 83 percent to ₹514.68 crore in Q1 and down by 63 percent to ₹1,054.9 crore in Q2 from a year ago. Aviation consultant CAPA estimates domestic air traffic at around 55 million in FY21 against an industry estimate of 205 million in FY20. with international travel still disrupted, Air India continues to repost losses. Unless there is recapitalisation, some smaller airlines will struggle to survive.

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