Union Budget 2021-22: How significant is it in the time of COVID-19?

The novel coronavirus disease (COVID-19) pandemic-induced crisis resulted in disruptions of services and activities in every sector, be it health, nutrition, education, water and sanitation or employment, thus affecting the marginalised sections of the country’s population severely.

Soaring demands on public spending nudged the Union government to provide a fiscal stimulus package towards reviving public services that broke down in the midst of the COVID-19 pandemic. However, the fiscal response has been weak; the need was for a much higher fiscal support.

In this backdrop, the forthcoming Union Budget is very crucial. Scheduled to be presented on February 1, 2021, it needs to recognise the scale and nature of the impact of the pandemic and announce bold measures for undertaking additional public spending on an urgent basis.

In the current scenario, it is estimated that the nominal GDP will register a negative growth of 4.2 per cent in the year through March 31, 21 compared to the provisional estimates for the financial year (FY) 2019-20.

Indeed, the slowdown of economic activities in the current fiscal translated into additional strain on government coffers. The adverse impact of the crisis is set to persist for much longer. Hence, this Budget must set into motion appropriate strategies for stepping up efforts towards addressing the crises and gradually restoring normalcy.

It also presents an opportunity to re-evaluate the overall budgeting structure for funding of critical sectors that are heavily overburdened and revealed the lack of emergency preparedness when the pandemic struck.

The Union Budget needs to look at states as partners in development and provide adequate fiscal support to the state governments, keeping in view the pace of recovery and the continuing need for additional expenditure.

It must provide for higher borrowing by states in FY 2021-22 than the limits stipulated under the Fiscal Responsibility and Budget Management (FRBM) Act, in order to help them meet the unusually heavy expenditure demands to address the challenges precipitated by the pandemic.

However, this will depend to a large extent on the recommendations of the 15th Finance Commission for the five-year period 2021-22 to 2025-26.

Implications of 15^th Finance Commission recommendations on state finances

Another major reason which makes this Budget critical is that the report of the 15^thFinance Commission would be made public along with the Budget 2021-22. An important area of the Finance Commission’s recommendations pertains to devolution of central taxes.

The share of the states in the divisible pool of central taxes is 41 per cent in the current fiscal, in line with the commission’s first report (applicable for 2020-21). This is anticipated to remain more or less unaltered.

The base, however, might shrink to some extent as the commission was tasked with additional terms of referenceto suggest a separate mechanism for funding defence and internal security, which are with the Union government.  Any shrinking of the base will reduce the share of states from the divisible pool in absolute terms, which would constrain their fiscal autonomy.

The Union government’s fiscal transfers to states have important implications for the states’ revenue kitty and their ability to carry out public expenditure. Tax devolutions from the Centre are a major source of revenue for states.

As cesses and surcharges do not form a part of the divisible tax pool of central taxes, the Union government’s increasing reliance on them has invited criticisms from several states in the recent past. The economic dislocations by the pandemic and their impact on tax collections have already meant a setback for the states on account of shortfalls in GST collections.

In the given situation, when the states are already fiscally stretched to meet additional expenditure in the wake of the pandemic and faced with the burden of shortfall in revenues, the central transfers by way of tax devolution should not be reduced.

The COVID-19 crisis has raised everyone’s expectations from this Budget. Representatives of different sectors have submitted their memorandum to the Finance Ministry during the pre-budget consultations.

There is an immediate need in every sector to provide for continued services for those who are completely dependent on public provisioning. Undoubtedly, health is a top-notch priority. Besides that, the Budget needs to make provisions for increased allocations for education, nutrition, water, sanitation and hygiene, agriculture and other programmes targeted at the disadvantaged, in order to improve public sector provisioning for these sectors.

This is the first in a series of pieces on the Union Budget 2021-22, in collaboration with Centre for Budget and Governance Accountability. 

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