Boost Aggregate Demand, Mobilise Higher Non-Tax Revenue, Says Rating Agency

Budget 2021: The major focus of the government to revive the economy amid COVID-19, has been on the supply side, but the focus should now shift to the demand side as well

Boost Aggregate Demand, Mobilise Higher Non-Tax Revenue, Says Rating Agency

Budget 2021: IIP data of November 2020 shows that economic recovery is fragile

Budget 2021: The upcoming budget 2021 should focus on boosting aggregate demand, reprioritisation of expenditure, and mobilising higher non-tax revenue, according to credit rating agency India Ratings and Research Private Limited (Ind-Ra). The major focus of the government to revive the economy amid COVID-19, has been on the supply side, but the focus should now shift to the demand side as well. The absence of adequate demand may affect the recovery and lead to a second-round impact. Even if the supply side gets restored through measures announced by the Reserve Bank of India (RBI), it may soon run into trouble due to the lack of adequate demand for goods and services.

Lately, the economy has also shown some positive signs with few indicators reaching pre-COVID levels of production amid demand due to the festive season. However, after two consecutive months of positive growth, a contraction in the factory output or the index of industrial production (IIP) in November 2020 reflects that recovery is fragile. According to India Ratings and Research, some specific measures which the government should focus on in Budget 2021 are as follows:

  • The creation of development financial institutions similar to Industrial Credit and Investment Corporation of India Limited, Industrial Development Bank of India should be done, who bring in patient capital. However, such an institution needs to be created in a way that their operations are ring fenced and they function independently.    
  • More support should be provided to the real estate sector, given its backward-forward linkage in the economy especially, affordable housing. Although a lot has already been done for this, as home loan interest rates fell to its lowest level in over 15 years, weak signs are still visible and may require further support on the tax front for a specified period such as GST waiver for the under-construction homes.
  • The reprioritisation of both revenue and capital expenditure towards essentials should be done, giving the top priority to mass vaccination and public health. Fixing the health issue would itself fix many of the ongoing economic issues and will have a cascading effect on the economic recovery.   
  • Besides reprioritisation of expenditure, the rationalisation or discontinuation of schemes should be done, especially the ones that have meagre resource allocation and are non-impactful
  • The mobilisation of higher non-tax revenue, much more than previous years, to fund expenditure should be taken up by the government. Even though tax revenue is also expected to increase on the back of an economic recovery, the true impetus to revenue receipts of the government can only come from the non-tax revenue.