“A king or Ruler is the one who creates and acquires wealth, protects and distributes it for a common goal. “
– Nirmala Sitharaman Union Budget 2021-22)
Budget is one of the most Buzz creative document of any country. The entire country keenly waits for this single document to determine many of their financial clearings the year ahead. James Wilson was the one who created India’s first Budget in 1860. Budget day is like a World cup final. The entire nation sticks to television, newspapers, electronic media etc., to get the update. There are several questions on a budget day like how many benefits were allocated to various sections of society? Is it favourable to print notes?
What is the fiscal deficit to GDP? Does budgetary deficit comprise disinvestment? And many more. Finance Minister Ms. Nirmala sitharaman has presented the first-ever paperless budget in Indian history on 1 February 2021 to promote the vision of Digital India in light of covid-19.
Budgetary Deficit or Conventional Deficit
The term deficit means shortfall or indebtedness. Simply it is the difference between earning and spending. Budgetary deficit or compensatory spending is the gap between all the receipts and expenditures for both revenue and capital. It is a large concept, including revenue deficit, fiscal deficit, primary deficit and monetised deficit. In contemporary India, the idea of the budgetary deficit is no more in existence.
The fiscal deficit has a short and long term impact on the Indian economy, i.e. it boosts spending, develops infrastructure, increases the rate of inflation, accumulates more debt, depreciates the value of the rupee and so on. In India, The Fiscal Responsibility and Budget Management (FRBM) Act 2003, sets a fiscal target for the government to maintain financial discipline in the economy.
As per the FRBM Act, 2003, the centre needs to limit the fiscal deficit to 3% of the country’s GDP by March 31, 2021. At the same time, the government’s debt should be restricted to 40% of GDP by 2024-25. Currently, the debt ratio is 90% of GDP. India is facing a fiscal deficit for over the last 40 years. In FY 2020-21, it had been estimated at 3.5% of GDP, but due to the Covid-19 pandemic, the target for the fiscal deficit was revised to 9.5% of GDP due to persistent lockdown, fall in revenue and increased public expenditure.
However, the actual fiscal deficit stood at 9.3% slightly lower than the revised estimates. In the current FY 2021-22, fiscal deficit has been targeted at 6.8% of GDP and through amendment of FRBM act fiscal deficit is targeted to be kept below 4.5% of GDP by 2025-26.
Keeping in mind the fiscal numbers, in FY 2021-22, the government of India proposed an expected disinvestment target of Rs 1.75 lakh crore, which is less than the previous target of 2.1 lakh crores for 2020-21. Due to the unforeseen disruptions caused by the pandemic last year, there is a clear doubt of those targets being met.
This year finance minister Nirmala Sitharaman announced the government’s disinvestment plans in Air India, Shipping Corporation, Container Corporation, privatisation of a general insurance company and two public sector banks and others. She said, ‘barring four strategic sectors, PSUs in all other sectors will be divested, keeping in mind strategic and non-strategic sectors’.
Tracing backwards historical footprints.
From independence till the 1980s, socialism was the front guiding wheel driving the Indian economy, following Gandhian and Nehruvian models for policy formulations and economic developments. Then, with Mrs Indira Gandhi elected as prime minister for the third tenure, India steadily took steps towards a free-market-based economy evident from the 6TH five-year plan.
Around the world, it was also a time-frame when the Soviet Union was collapsing, and with it the possibility for economic growth following the socialistic principles as well. Furthermore, with the liberalisation, privatisation and globalisation [LPG] reform of 1991, India officially moved more towards a free market economy.
Capitalism cares for profit only?
The capitalist economic model is one in which government hardly produces anything. Its role is restricted to merely the administration and regulation of markets, and that’s precisely what the government is presently trying to achieve.
The capitalistic system runs on various principles, ‘profit’ being one of its central characters, and efficiency is regarded as the cause and effect of capitalistic decisions. Most of the holdings of the PSUs were loss-making, inefficient and running on debt, further enlarging governments deficits, thus left the government with no other alternative but to divest.
Making ‘public-sector-undertakings [PSU] private.’
In India, PSUs and the orientation of social welfare schemes are considered the crown jewels of the Indian government’s ‘socialistic legacy’. With the introduction of new economic policy, the Indian government privatised PSUs by selling off part of its equities through disinvestment, thereby keeping control of some strategic sectors with itself only. It can be of three types-minor disinvestments [government retains 51% or more of its shareholdings], significant disinvestment [sells majority, retains some], and privatisation [complete handing over].
All the money raised through disinvestment is channelized to national investment funds. The term ‘strategic disinvestment’ is gaining wide popularity these days. It implies carefully and legally analysing, evaluating the government’s assets and disinvesting some part of it so that it no longer remains any burden; rather it remains beneficial for the government. That’s why the Central government in some recent budgets announced the target of strategic disinvestment.
Motives behind disinvestments
For the past few consecutive years, the government is extensively focusing on disinvestments, and that makes us a little curious to know the reasons behind it. Some of the main reasons behind disinvestment are:-
• To raise funds for upgrading, expanding and modernising of PSUs.
• To introduce competition in the market,
• To foster innovation, thereby expanding markets,
• To transfer any commercial liability, both economic[government will no longer bear employee liability on a pension, retirement expenses etc.] and market risks[ bearing losses due to fluctuations in interest rates etc.]. and, most importantly
• To meet the budgetary needs of the government and to reduce the fiscal deficits.
Here one thing to note is, it makes sense when the government plans to disinvest loss-making and inefficient units, but surprisingly the list includes profit-making ones also. It clearly states the government’s intentions to withdraw/limit itself from doing business.
The governments’ participation in the market should be limited because of the simple reason that ‘government comes and government goes’ but ‘economy, institutions and development plans must be permanent’ if India aspires to become a superpower in the arena of the global economy.
Conclusion:-
In India, the central government’s inclination towards the capitalistic economy is evident and not entirely welcomed by many. The reason lies in the drawbacks of capitalist systems where workers have to face exploitation; society gets divided based on the haves and have nots.
The government should strive to minimise its drawbacks so that the Indian economy can reap the benefits of maximum efficiency [output] and minimum [inputs] wastage from the capitalistic model. Disinvestment is inevitable and sooner or later government will minimize its presence in business except in strategic areas.
It is evident from the policy of all successive governments post-reform era. Inadequate revenue receipts and booming public expenditure makes it compulsory for government to sell off the loss-making and inefficient PSUs. However, there should always be a check on private sectors to ensure public welfare as the people of India is still not in a position to face the harsh truth of an open market economy.
Thanks.