Dissecting the Indian Union Budget for FY2021/22 and understanding it from Nepal’s perspective

The Indian government’s budget has deep-rooted implications to the Nepali economy since the Nepali currency is pegged to the Indian currency and over 60% of the trade that Nepal does is with India. The two countries also share an open border, homogenous socio-cultural ties, and similar topography. Moreover, India has also had a history of providing preferential treatment to Nepali exports. Hence, given the deep-rooted economic implications of India’s union budget on the Nepali economy, this article aims at dissecting the Indian budget and discuss key takeaways from the Indian budget from the Nepali context.

Overview of the Indian Budget for FY 2021/22:

The Finance Minister of India tabled the 2021/22 union budget in the parliament on 1 February 2021 with a total capital outlay of USD 478 billion (INR 34.83 trillion), a 14% increase compared to the 2019/20 fiscal year. ^[2] The major allocations in the budget have been USD 65.64 billion (INR 4.78 trillion) to the Ministry of Defense, USD 35.27 billion (INR 2.56 trillion) to the Ministry of Consumer Affairs, Food and Public Distribution, and USD 22.86 billion (INR 1.66 trillion) to the Ministry of Home Affairs. ^[2] The Indian government’s major sources of revenue are expected to be Borrowing and Liabilities (36%), GST (15%), Income Tax (14%), and Corporation Tax (13%). The higher capital expenditure aimed at boosting the economy which has shrunk by an estimated 7.7% due to the COVID-19 pandemic, is estimated to increase the fiscal deficit to 9.5 percent of GDP this year.

The capital expenditure in the FY2021/22 budget has increased by 26.19% from USD 60.19 billion to USD 75.96 billion in the FY 2020/21. In her budget speech, the Finance Minister announced that the higher capital expenditure for FY2021/2 was focused on providing a major boost to healthcare and infrastructure building in the country. The health spending for the fiscal year which is primarily focused on improving health systems and funding the vaccination drive to immunize 1.3 billion Indians has increased by 135% to USD 30.72 billion (INR 223billion)from the previous fiscal.

In the budget speech, the finance minister highlighted that the union budget proposal is based on six pillars:

• Physical and Capital Infrastructure
• Health and Well-being
• Inclusive development for Aspirational India
• Re-invigorating human capital
• Innovation and R&D
• Minimum government and maximum governance

Physical and Capital Infrastructure
One of the main highlights of this year’s budget has been the Production-linked Incentive (PLI) scheme push. The government has allocated a total of USD 27.04 billion (INR 1.97 trillion) for this scheme that will be disbursed within 5 years starting this year. Under this scheme, the companies in selected sectors – Food processing, Textiles, Mobile Phone manufacturing, Allied Equipment, Pharmaceutical ingredients, Medical devices, Food processing, Textile, Leather, and Battery manufacturing will be given incentives on incremental sales from products manufactured in domestic units. The nature of the incentives provided to each sector has not been elaborated in the budget but is likely to be provided through tax breaks, ensuring more liquidity to the businesses and infrastructure development. The objective of the scheme is to primarily reduce government spending on these capital-intensive sectors and also to make India more compliant with its WTO commitments. The government is willing to provide plug-and-play infrastructure to companies in these sectors willing to come to India.

The setup of a professionally managed Development Financial Institution (DFI) with a sum of USD 3.7 billion (INR 270billion) has also been proposed to finance social and economic infrastructure projects under the National Infrastructure Pipeline (NIP). A National Monetization Pipeline of potential brownfield infrastructure assets will also be launched this fiscal year. Furthermore, the NIP, which had 6,835 projects under it will now be expanded further to 7,400 projects with an additional investment of USD 76.04 billion (INR 5.54trillion) in the next fiscal. The long-term financing of infrastructure projects through the NIP by the government solves the issue of underlying asset-liability mismatches in the banking sector. There have also been significant investments in road and highway expansion projects in India. Tamil Nadu and Kerala have been the biggest benefactor of this with USD 14.14 billion (INR 1.03trillion) and USD 8.9 billion (INR 650 billion) allocated for highway expansions in these states respectively.

The Government of India has also decided to increase the Foreign Direct Investment (FDI) limit in the insurance sector from 49% to 74%. This decision comes with the aim of increasing insurance penetration and competition to increase value for customers in terms of better products at lower costs. This is expected to lead to better household savings which in turn will create long-term assets in the country. The government has proposed an amendment to the 1938 Insurance Act to enact this. The government is also planning to divest government holdings through strategic sales of its stakes in Bharat Petroleum Corporation Limited (BPCL), Air India, IDBI Bank, Shipping Corporation of India (SCI), and BEML. The government has also asked the Niti Aayog – The Government of India’s policy think-tank to identify the next list of companies for strategic sale.

Health and Wellbeing
The health sector has received substantial importance in this year’s budget given the pandemic situation the country is currently faced with. India is encountering world’s second highest COVID-19 caseload after the United States of America. Thus, this year’s budget has allocated USD 30.72 billion (INR 223.85 billion) to Health and Wellbeing, an increase of 137% compared to the last fiscal. Out of this allocation, USD 4.8 billion (INR 350 billion) will be spent on COVID-19 vaccine development & inoculation. The government has also launched the Pradhan Mantri Atma Nirbhar Swasthya Bharat Yojana– which plans on upgrading primary secondary and tertiary healthcare infrastructures in the country with an outlay of about USD 8.8 billion (INR 641 billion) over 6 years.

Inclusive Development for Aspirational India
The pillar of Inclusive Development for Aspirational India covers the agriculture and allied sectors, farmers’ welfare and rural India, migrant workers & laborers, and financial inclusion.

In this fiscal’s budget, the Minimum Support Price (MSP) regime will ensure a price that is at least 1.5 times the cost of production to the farmers across all commodities. Concession for agricultural development has been proposed through a reduction in petrol and diesel prices by INR 2.5 per litre and INR 4 per litre respectively. Furthermore, to ensure enough credits to farmers, the budget has enhanced the agricultural credit target to USD 226 billion (INR 16.5trillion) in the fiscal year 2021/22. The Rural Infrastructure Development Fund has also been increased by over 33 percent to USD 5.4 billion (INR 400 billion) this fiscal year.
In a landmark decision, the implementation of 4 labor codes is also proposed by the Indian government through this year’s budget. This ensures that social security benefits will be extended to even gig and platform workers through the Employee State Insurance Corporation. The budget has also allocated USD 2.2 billion (INR 157 billion) to the development of the Micro, Small and Medium Enterprises (MSME) sector in India. Schemes under this include increasing duty on steel screws, plastic builder wares and prawn feed. Also proposed is the review on import duty as an incentive to exporters of garments, leather, and handicraft items.

Re-invigorating human capital
The budget looks to quantitatively strengthen 15,000 schools across the country to include all components of the National Education policy. The Finance Minister further proposed to set up a Higher Education Commission of India and new schools across the country. The government’s budget has also planned on setting up new schools in tribal areas, hilly areas targeted specifically for backward communities.

Innovation and R&D
The FY2021-22 budget gives continuation to the National Research Foundation, which focuses on national priority thrust areas. The government is undertaking a new initiative called the National Language Translation Mission (NLTM) which will enable governance and policy knowledge to be made available in major Indian Languages over the internet. Furthermore, the New Space India Limited (NSIL) is being financed to launch new satellites including an unmanned launch as part of the Gaganyan mission.

Minimum Government, Maximum Governance
This expansionary fiscal budget in addition to the revenue sources of the government decreasing, the budget deficit has reached 9.5% of the GDP this fiscal year. The government looks to reduce this to 4.5% of GDP by the fiscal year 2025-26. The Government has also decided to allow a normal celling of net borrowing to the states at 4% of Gross State Domestic Product (GSDP) for this fiscal year. This is expected to make an additional USD 58.66 billion (INR 4.28 trillion) available to the states.
The Finance Minister is also looking to address the issue of further simplifying the Tax Administration, Litigation Management and ease the compliance of Direct Tax Administration. The Minister has scrapped income tax for senior citizens over the age of 75 under the condition that their source of income is only pension and interest income. Furthermore, the budget has also addressed the issue of double taxation for Non-Resident Indians (NRI), reduction in the time period of tax assessments, and individual tax exemptions on capital gains if they invest in startups. The Minister has also taken steps to streamline Goods and Services Tax (GST) collection through the use of deep analytics and artificial intelligence to identify tax evaders and fake billers, launching a special drive against them. A revised customs duty structure fee is proposed to come into effect starting October 2021. A total amount of USD 5.16 billion (INR 376billion) is also being allocated for the 2021 census, which will be the first digital census in the history of the country.

The Indian budget from the Nepali perspective and key takeaways
The Indian budget for FY 2021/22 increased grants to Nepal by 12.72%, increasing its allocation to USD 136 million (INR 9.92 billion). This is however 20.72% lower than what was provided in FY 2019/20. The grants allocated to Nepal will likely be put on existing projects such as the River Training & Construction of Embankments along the Khando, West Rapti, Banganga, Bagmati and Kamala rivers, construction of the Hulaki Margha and Terai road expansion.  Other measures taken in the Indian budget like the removal of double taxation to NRIs will be a huge benefit to a lot of Indian businessmen based out of Nepal and the highway expansion projects in states West Bengal and Tamil Nadu will aid in streamlining the supply chain for Nepali imports and exports to and from the ports of Kolkata and Visakhapatnam. However, the increase in the Indian defense budget might imply a harder Indian stance on the disputed territories it has with Nepal.

There have been several positive steps taken by the government of India in this year’s budget which can serve as takeaways for Nepal in upcoming budgets of our own. Some key takeaways include:

1. Tax holiday for an additional year and individual tax exemptions for investments in startups – Current historic lows in interest rates coupled with capital gain tax exemptions for startups could reignite the sluggish enterprising environment in Nepal. With the entire world economy likely to enter a recession and a subsequent unpredictable labour market on the cards, Nepal’s economy is unlikely to absorb the returning migrant workers or the manpower joining the labour pool. Hence, policies centered at fostering and promoting startups with tax breaks and easy access to credit could contribute to rebuilding the country’s economy from an inevitable recession.
2. Scrapping of income tax for senior citizens (75+) if their primary source of income is only pension and interest income – Nepal has a healthy growing pool of people joining the formal sector of the economy with provisions of pension and bank deposit savings. Introducing provisions that allow for easier tax filing for senior citizens is a step in the right direction keeping the future in mind. The workaround for the current system would be that the paying bank itself will deduct the necessary tax from the senior citizens’ income. Another positive step would be the provision of an exemption on filing of their income tax returns.
3. Opening of the insurance sector of the country to further Foreign Direct Investment (FDI) with a cap of 74% compared to 49% earlier – Although Nepal’s insurance sector does allow for higher percentage of FDI in the insurance sector than in India, certain rules like foreign insurance companies not being able to insure directly in Nepal and Nepali projects having to ensure local insurers with back to back reinsurance with foreign insurers need to be reviewed. While these rules do protect the Nepalese market, they cut into the profit margin of the insurance companies. A greater profitability margin will invite higher foreign capital influx into the sector, allow for greater choices to the population, lower costs and ensure greater insurance penetration in the country.
4. Creation of an Asset Reconstruction Company/Asset Management Company (ARC/AMC) – popularly known as “bad bank” – Creation of an Asset Reconstruction Company is a move directed to cleaning the book of banks. The Indian budget provides the provision for a good chunk of the Non-Performing Assets (NPA) worth USD 123.5 billion (INR 899 billion) as of March 2020 to be transferred to the bad bank. These Non Performing Assets are then held by the bad bank until a later date when they can be sold at a discount. Nepal’s manufacturing, tourism and hotel sectors have been severely affected by the current pandemic leading to a high number of loan defaults in these sectors. An Asset Reconstruction Company set up by the government that buys the bad loans of the banks and financial institutions would avoid stress on the financial sector in the country and also deflect the issue of a credit crunch in the financial sector during the time of the global recession.
5. Production Linked Incentive (PLI) scheme push to give incentives to companies working in capital incentive sectors – The Nepali government has a lackluster history investing in sectors that require a large investment in production or R&D. Allowing foreign investors into these sectors with production incentives will allow for foreign expertise to come in critical sectors which can contribute to increasing exports and setting up of high margin manufacturing in the country.
6. Creation of a framework to give consumers alternatives to choose from more than one power distribution company. The Government of India has announced that a framework will be put in place to allow consumers to choose from more than one Distribution Company – The monopoly that the Nepal Electricity Authority (NEA) holds in power transmission in distribution goes against the philosophy of a free market. The monopoly of the state-owned entity coupled with its inefficiency has meant a lot of hydropower projects in the country have not gone into construction due to the lack of transmission lines. While the private sector has shown interest in building transmission lines in various corridors namely Khimti, Nuwakot, and Lamjung, a lack of clear-cut policies for private participation in transmission lines has hindered such development. In addition, Independent Power Producers are compelled to sell electricity to NEA as a Single Buyer Model is operating in Nepal, and NEA has shown reluctance in signing the Power Purchasing Agreement (PPA) citing excess energy during the wet seasons. The government entity has been faced with underlying problems in areas of land acquisition, the rigidity of the Public Procurement Act, the poor financial health of the institution, lack of an efficient tariff regime, lack of efficient management practice, and the lack of an open access policy in transmission service. Allowing for foreign investment into the transmission with the NEA overseeing the distribution side would be a positive move.
7. Strategic sale to divest government holdings. The Government of India has decided to strategically sell its stake in Public Sector Enterprises such as Air India, BEML, and IDBI Bank  – The Government of Nepal has a total share investment of NPR 200.37 billion in Public Enterprises in Nepal. In 2019, the government received only NPR 9.89 billion as dividend from its investments into its Public Enterprises. Out of the 39 Public Enterprises in Nepal, only 26 make a profit. The sector has been plagued with an inefficient bureaucracy and mishandling of its resources. The case of Nepal Airlines Corporation (NAC) has been the epitome of the inefficiency of the government to run a business. The lead taken by the Indian government to withdraw government intervention in business and focus more on ensuring better governance is a move Nepal should look to mirror.
8. Resolution of bad debt. Aimed at further strengthening National Company Law Tribunal(NCLT) framework and continuing with the e-court system for faster resolution of bad debts. A separate framework for MSMEs is also set to be made by the Government of India – Nepal’s track record of contract enforcement and streamlining processes for issues around insolvency, bankruptcy is not strong enough to invoke investor belief in the Nepalese investment environment. Setting up an e-court for faster resolution of bad debts will ensure greater investor confidence in the future and streamline the ease of doing business in Nepal.
9. Power Sector push. The Government of India has allocated a huge USD 49.32 billion(INR 3.60 trillion) investment into launching a revamped reforms-based, result-linked power distribution scheme. The scheme provisions assistance to distribution companies for infrastructure creation tied to financial improvements including prepaid smart metering, feeder operations, and up-gradation of systems – The Nepal Electricity Authority(NEA) has in the past few years been successful in reducing system losses to 15.27%, expanding distribution lines, initiating construction of new transmissions lines and preventing electricity theft. The government authority has also initiated the implementation of Enterprise Resource Planning (ERP), Geographical Mapping (GIS Mapping), Smart Metering, and Substation Automation. However, it must ensure further investment in a revamped power distribution scheme, centered on infrastructure creation to upgrade existing systems that will ensure further profitability in the long term.

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