Balance of Payments Crisis 1991: An Eventful History

The Balance of Payment crisis in 1991 is undoubtedly, one of the most critical events to take place in the history of Indian economy and politics. The valiant effort in managing the crisis by the then incumbent government, steered India onto the path of economic liberalisation and prosperity. 

In hindsight, this watershed event can be viewed as a blessing in disguise for India. The confluence of bureaucracy, academia, institutions worked so well to pull India out of the crisis trench. Simplistically, one can understand that India went into the pitfall of the BoP crisis as it was unable to pay off its debts. But sometimes, it is fascinating to delve into the ‘why’ part of such an even happened. Why did India descend into such a situation? What were the warning signs? Did the policy was adequate enough to prevent the systemic risk, etc?

These were some pertinent questions that led me to delve deeper into the reasons and get a better understanding of it. Let us traverse through the series of the following activities that led to the creation of the crisis.

India had been significantly under pervasive administration control and its economy policy exhibited a strong inward orientation until early 1980s. The first half of 1980 saw a large increase in the central government’s deficit, primarily on account of high expenditure levels especially on agricultural subsidies, defence, and interest payments. On external account, higher imports dominated over exports. The Current Account Deficit (CAD) widened extensively due to higher import bill. The dependence on commercial financing increased significantly. The debt service ratio reached almost 30% (i.e. India had already used 30% of the total borrowed funds) in the late 1980s. The fiscal deficit as a percentage of GDP escalated to 9.4% in 1990-91 as against the average of 6.3% in the first half of 1980s. The increase in the money supply contributed to rise in the inflation and exerted pressure on the BoPs. The bulk of the outflow of funds amounted to nearly US$ 1 billion during April-June 1991. During 1988-1990, external commercial borrowings rose. The reliance on non-resident deposits continued with interest rates rising above the international levels. The perception towards external financing to be a stable source of funds resulted to be a whammy.  India faced large external and internal financial imbalances and was vulnerable to external shocks around 1990.

India’s tendency to extensive reliance on external financing and resorting to financing on commercial terms during 1980s resulted in relatively high debt at the end of the decade. The official reserves were drawn from 5 months of imports in the mid-1980s to a little over 2 months of imports at the end of 1989-90. Reserves declined by 71.2% from Aug 1990 to Jan 1991 (US$ 3 billion to US$ 896 million). The gross official reserves stood at US$ 5.8 billion (1.3 months of imports) by March 1991 despite purchase of US$ 1.8 billion from IMF in January 1991. Inflation rose to 12% while CAD widened to 3%. 

The situation exacerbated further due to sudden outbreak of the gulf war, annexation of Kuwait, higher oil prices, loss of workers’ remittances, policy slippage, domestic political unrest, postponement of the general elections followed by the resignation of the government in power in March 1991. The withdrawal of NRI deposits intensified during

1991-92. Exports stagnated largely due to slack in demand in key markets in Eastern Europe and the Middle East industrial nations. India’s sovereign credit rating was seriously downgraded. The burden fell mainly on monetary adjustments and direct import compression measures. 

By the mid-1991, the BoP crisis turned into a crisis of confidence and India’s default on its debt obligations seemed as a certain possibility in June 1991. India’s external liabilities stood at US$ 68.8 billion at end March 1992.

Management of the crisis and its resolve

The crisis presented the policymakers with the opportunity to pursue liberalization. The then Prime Minister P.V. Narasimha Rao roped in Dr Manmohan Singh as the Finance Minister to undertake economic reforms and embarked upon a historic economic transition of India along with their administration by abolishing License Raj and introducing liberalisation. 

Here are the key highlights of the reforms-

  • Industrial licensing was abolished (except for 18 industries). 80% of the industry was taken out of the clutches of the licensing framework.
  • Reforms in capital market, trade, infrastructure, and financial sector took place.
  • Automatic approval of FDI was done up to 51%. 
  • Public sector units were given more autonomy. Disinvestments in many PSU units were initiated.
  • Investment caps on large industrial houses were removed. MRTP act was revoked to foster capacity expansion and diversification.
  • Exporters were permitted to open Foreign Currency Accounts.
  • Access to foreign technology was liberalized.
  • Import licensing was abolished. 
  • Import duties were sharply reduced.

In October 1990, RBI imposed higher cash margins of 50% on imports, other than capital goods, for those against foreign sources of credit. In 1991, the cash margins increased further to 133% and 200% in March and April respectively. The government imposed surcharges of 25% on prices of petroleum products and also raised customs duties. RBI imposed 25% surcharge on interest on bank credit for imports. The measures undertaken resulted in significant import compression. Though it proved to be counterproductive as it affected exports. 

The Rupee (₹) was devalued by 18% in 2 phases- on July 1st and July 3rd ,1991. The dual exchange rate system was introduced in 1992 to contain the exchange rate volatility. The large outflow of funds was recouped to a large extent by subscription to India Development Bonds (IDBs) aggregating US$ 1.62 billion with bonds having elongated maturities. India received financing from World Bank, ADB and Japan aggregating US$ 1billion. Aid-India consortium committed aid during 1991-92 amounting to US$ 6.7 billion for India. The value of the gold holdings with RBI was at US$ 3.5 billion during 1991-92. The RBI in consultation with the government evaluated the value of the gold reserves to raise foreign exchange resources. The arrangement to utilise gold was done with the intention to be temporary as well as reversible.  As means of raising resources, RBI in 1991 pledged 47 tons of gold with Bank of Japan (BoJ) and Bank of England (BoE) to raise a loan of US$ 405.0 million. United bank of Switzerland (UBS) purchased approximately 20 tons of gold and paid a consideration of US$ 200 million to the government. Finally, the IMF approved credit tranche amounting to US$ 2.2 billion to be availed in instalments over 20 months under the 1991-93 stand by arrangement subject to the conditionality imposed by IMF. 

The successful management of the BoP crisis succinctly shows the vigour of the government under the leadership of P.V. Narasimha Rao that India was in no way to default on its debt obligations. The government was adamant to rebuild the sovereign rating of India and restore the market confidence on the Indian economy. The measures were taken prudently to weed out the crisis gradually. The co-ordinated financial aid received by India from global financial institutions was the result of strategic negotiations and collegial relationship nurtured between Indian administration and the institutions over the period of crisis. The incipient impact of the reforms undertaken was evident as the foreign exchange reserves had climbed to US$ 9.8 billion by the end of 1992-93 and economic growth had recovered to 4.0 percent. The fiscal deficit reduced from 8.4% in 1990-91 to 5% of GDP in 1993-94. In 2003, India successfully repaid its debt that it received from the IMF under the 1991-93 stand by arrangement. Through the end of the decade, India didn’t have to borrow. 

As the times have progressed, India has become a favourable destination for the FPIs, FDIs. The world is converging in India. It currently ranks 5th on the list of the world’s biggest economies. It has gained the precious tag of the” fastest growing economy” among the major economies in the world. So much for an economy that once faced the risk of defaulting on its debt commitment, gaining the title of the  fastest growing economy in 2018-19 is a feat unprecedented and a matter of pride for us fellow Indians.   

Digital Speculation & Economy

Let us understand the entire volume of money in transaction and try to ask a few questions? What is the Global GDP? How much is the world’s richest person’s share as compared to the total wealth?

A huge corpus of the money is floated around from person to person everyday – people buying at a price just to sell off to another person offering a higher price. A comparison with All Money in the bubble gives us an understanding how big a part – Digital Speculation of Financial Market is!

Ever wondered how stock price fluctuate? And what exactly is demand and supply affecting the market price to move up and down by the second?

It’s basically the bid and offer price. At any random given time, we have a number of buyers willing to buy a stock and a number of sellers willing to sell the stock at any given price. The exchange puts these ‘limit orders’ in a tabular form and decreasing order of “Buy Price” and increasing order of “Sell Price”. Bid price is the highest price (highest auction price) one is willing to pay to buy a stock. Offer Price is the least price (lowest sell price) one is willing to sell for this stock.

This is what we call the market depth. Generally, this bid price and offer price are very close to one another and offer price is slightly above bid price at any given time. This is called the Current Market Price (CMP): Offer Price for a buyer (because he will buy from the lowest seller) and Bid Price for the seller (because he will sell to the highest auction bidder).

How markets move? It’s generally BUY and SELL power. Huge buying will clear off all levels of Sell Price at the exchange and fresh bid will come thereby taking the CMP higher (higher demand). Sharp selloff can make the price come down as it will clear off Bid Price levels and fresh offers will come to settle.

Market Depth and how the Bid & Offer Prices move by the second

Now understand this. What if my intention of buying is just to sell off to the next buyer? Or in simple terms, my buying decision is simply based on the interest of the next buyer. Yes, this can happen when there’s a panic buying or selling – driven by emotions and this over a few trading sessions can end up to crazy valuations. In the stock market, some stocks to be intrinsically valued at 5rs sell at 50rs and some for 50rs sell at 5rs only.

Okay, at least for an asset class that produces something (like a farmland or a company share) – you have an entry point. A PE ratio – at what multiple of its present earnings you must pay to enter the business’ ownership! What about Gold or other metals? Or Cryptocurrency?

“BTC is an asset class that produces nothing” – Buffet

The concept of cryptocurrency is unique with hashing methodologies which can prevent time, infrastructure & cost of a conventional banking system. Though the idea has some challenges and markets do see the maximum future it can – should an idea be valued at $1 trillion with a single bitcoin trading at $57,000+?

The Power of Social Media Influence

Many of these price speculations are done not only by panic buying or insider trading – it can be as simple as a tweet or post. Provided the tweet comes a personality like Elon Musk. A stock price surging 1000% or BTC gaining a hundred billion dollars’ worth of valuation over a single tweet on a single day proves a ton on how emotions are linked with the current market price we see.

A single tweet increasing valuation of hundreds of billions of dollars is what the Power of Influence is

Will the Speculative Price Bubble Burst?

We all remember the US real estate bubble of 2007. Did AIG or Lehman Brothers see it coming 2 years in future? Super high rents on super expensive houses in New York City and thousands of defaulters and collateralized debt obligations (CDOs) finally resulted in the burst of bubble and bankruptcy of a some of the world’s biggest financial institutions in Wall Street.

Can this happen to BTC? Again, forget human emotions over a brilliant idea, tweets by richest people of the planet – isn’t it too highly valued over just an idea being speculated over each trading session?

Let’s understand what a crash is.

Consider February-March downfall in world markets over Covid pandemic. Investors of the world thought it to be a disaster and since markets see as much as they can see in the future – retail investors to corporate MFs started sharp selloffs. Somewhere along the line it feels “This is the End” and slowly it persuades others to escape. The prices slowly start to be driven by emotions than fundamentals and logical possible outcomes and thereby “Panic Selling” and huge decline happens!

Similarly a bubble burst (E.g. 2008 US Housing Bubble Burst, 2000 dot-com bubble burst) happens when there is a huge rally and overvaluation of an asset driven by emotions and speculations (“People buying betting on the excitement of the next buyer”). And then suddenly the balloon bursts due to the nature of the unhealthy growth beyond logical fundamentals.

Finance amalgamated in evolving modern technology is where the world is heading towards. Maybe cryptocurrency is the universally accepted alternative for the conventional banking across the world – and maybe from 2040 to look today in 2021 BTC is still very cheap in valuation!

The Big Fat Economics of Indian Weddings

A popular Hindi movie titled “Band Baaja Baraat” based on the business of wedding planners has the protagonist speaking a dialogue “Recession ho ya inflation, shaadi toh honi hi hai” which translates to the conviction on how weddings are actually protected from any kind of economic roadblocks.

But what does actually the big fat Indian wedding entail for the entire economy? Starting with the provision of employment to a vast size of the population, to actually cause a movement of money in the circular flow of the economy ranging from gold purchases to durable goods being a part of gifts being passed on during the glittery affairs. The concept of gig-economy may have found its name during recent times but the wedding business thrives mostly on the temporary gigs that the various vendors may be a part of. Across the globe people find it to be an intriguing point of discussion, about Indians standing shoulder to shoulder as the country celebrates together. A true reflection of the colorful Indian culture actually involves the expenditure of 1/5th of an individual’s lifetime wealth. The idle money that might usually spend its major span of life in the lockers of banks may also see the light of day with these life-size events.

As per an estimation by the global media giant Conde Nast in 2013, the Indian wedding business stands at $38 billion per year which is equivalent to the GDP of a developing country. Weddings boost many industries related to wedding planners, decorators, Mehendi artists, bands and musicians, photographers, and caterers to name a few. Going by the exponential growth of the business, KPMG reports of having approximately 60.5 million weddings taking place in India from 2017-2021 which can be marginally affected since the outbreak of pandemic but if the revival rate is a model being followed and with a dropping number of active cases while the enthusiasm sores heights among individuals to turn their backs on the COVID-19 infection fears.

There has been a noticeable rising trend in the customizations of cards which has boosted the cards industry to value more than Rs. 5000 crore. The glitter is incomplete without the gleaming clothing. Designer clothing actually pushes the business to thousands of crores every year. The dreamy-eyed wedding of Indian cricket team captain Virat Kohli and actress Anushka Sharma made a lot of heads turn with the exclusively designed apparel by designer Sabyasachi. As the prominent personalities pull off these designer dresses, there is a hoard of local market players who would replicate a similar low-cost design that would be economically more reachable to a lower band of income levels as well. According to the celebrity designer Sabyasachi, the Red Benarasi saree donned by actress Anushka Sharma would flood the market with similar copies and hence pushing thousands of local weavers to enable a better living.

If the cards and clothing needed anything to complement, it is the makeup. Vivek Bharti, who heads the Bollywood-Hollywood International (BHI), a Mumbai-based make-up and hairstyling academy says that people at Indian weddings spend around Rs. 15,000-30,000 on bridal make-up compared to $150-200 in the US. While the makeup industry grows at a positive rate of 20% annually and awareness of make-up growing at a rate of 50%, newer categories of Jobs are also emerging as the professional make-up artists are being paid heavily.

There has also been a growth of startups focussed on wedding business-like ‘Wanted Umbrella’ which gives a platform for the differently-abled people to find a suitable match for themselves and ‘ForMyShaadi’ which lets the couple getting married to create a bucket list of all the gifts their family and friends. To finance the extraordinary expenses many banks and non-banking financial companies offer tailor-made personal marriage loans and financial products like wedding insurance being the new offering to cover for situations of cancellations caused due to various reasons.

The gold consumption and purchase is also a major factor during Indian weddings to make it a head-turner for economics enthusiast as Somadsundaram PR, MD of World Gold Council, India quotes “The country’s demand is largely in the form of jewelry in which 50-60% is bridal”. The clubbed effect on these variables can be collectively labelled as the “Weddonomic Effect”. With additions to the celebration and more and more enthusiasm over the ‘once in a lifetime event’ and the COVID-19 introducing a new normal to all our lives there is bound to be a bump in the usual growth of the wedding industry but the cycle shall keep running while the wheels continue to accelerate the economy at a micro level to create a macro impact.

AGRICULTURE SECTOR

The budget presented on 1st February 2021 was an important one for Indian agriculture. It was the 1st budget in the COVID era thus it had the ownership to bring back growth in a sector that employs 60% of India’s population. Also, in 2015, the government made a promise to double farmers’ income by 2022, thus it had the onus of one final push to fulfill this promise. In addition to that, this budget has been presented in the background of the ongoing Farm Law protests and could have been used to mollify the situation by increasing budgeted allocation for the agriculture sector.

This year, the government allocated Rs.1,23,018 crore to the Dept. of Agriculture, Cooperation and Farmers’ Welfare (DACFW) which is 8% less compared to Budgeted Expenditure (BE) in FY21. This department is responsible for the implementation of schemes such as Pradhan Mantri Fasal Bima Yojana, which provides interest subsidy for short-term credit to farmers and promotes up-gradation of skills to enhance the adoption of technology in this sector. Due to this decline in budget allocation towards DACFW, the PM- Kisan Scheme, which provided direct cash support to farmers of Rs. 6000, has seen a decline of Rs. 10,000 crores to Rs. 65,000 crores in FY22. This is a surprising move considering the current political and economic situation of the country as it was expected that agriculture and allied sectors will not see a decrease in budgetary allocation. Although, due to COVID-19, the government had introduced a revised budget in 2020, thus the current allocation is 5% more than the revised estimates of FY21.

In this budget, the government has ensured its commitment to the APMC system, a point of contention in the recent farm protests. Now, APMC’s will become eligible to utilize Rs. 1 lakh crore financing under the Agriculture Infrastructure Fund (AIF) which will lead to enhancement of infrastructures of the mandis. In addition to this, 1,000 APMCs will be connected to the e-National Agriculture Market (e-NAM). An additional source of funding for the agriculture sector has been made through the introduction of an Agriculture Infrastructure and Development Cess (AIDC). Through this cess, the government hopes to raise Rs. 30,000 crores to build infrastructure facilities for post-harvest produce in the mandis. According to a study conducted by NABARD, there have been infrastructural gaps ranging from 10% in case of cold storage (bulk & hub) to 99.6% in the case of packhouses. In India, food worth Rs. 92,651 crores are lost in post-harvest processes. [1]Insufficient private investment in such infrastructure and logistics is one of the principal reasons for such gaps. [2]Thus, creating a cess fund for this purpose is a move in the correct direction.

In addition to the existing 6,000 Farmer Producer Organisations (FPOs), the government has budgeted Rs. 700 crores to the development of 10,000 new FPOs. Almost 86% of Indian farmers have small and marginal land holding sizes i.e. 0.58 hectares of land only. These small land sizes make it impossible for them to achieve economies of scale which come from increasing production thus leading to low costs. However, when farmers join FPOs, they get shared access to markets, schemes, and credit. For example, Maharashtra based Rushiwat Farmer Producer Company Ltd. (RFPCL) with 1270 farmer shareholders, now owns a seed and turmeric processing plant and a warehouse where the product is sorted and graded. In 2019-20, the FPCL made Rs. 1.32 crore and received a premium for the turmeric they grew. [3]

Although the FY22 budget does not make provisions for any immediate relief to the agriculture community, it has made necessary allocations that will make this highly inefficient sector self-reliant and resourceful.

Author: Ambika Shevade
Editor, TJEF

[1] https://medium.com/@IamDineshN/post-harvest-losses-in-india-fa7e3e8981fe

[2] https://pib.gov.in/newsite/PrintRelease.aspx?relid=199102

[3] https://www.livemint.com/news/india/how-farmer-led-firms-are-hedging-inflation-11600094280389.html

BFSI and Disinvestment in Budget 2021

The banking and Financial Services Industry is an integral part of the spine of the finances of our country. With a contribution of Rs.107.83 lakh crore just by the public sector banks in FY20 itself the segment is moving at an accelerated growth rate of 3.57% compounded annually. There has been a major influx in newer technologies into banking services with the internet boom and the higher acceptance of digital payments across the channels ever since the demonetization move in 2016. Private players like WhatsApp bringing in UPI payments facility and the setup of NPCI (National Payments Corporation of India) have also promoted the growth of BFSI and its overall infrastructure over time. These facts alone are good enough to justify the importance of the sector in our economy. A small dent in the variables or a minor positive plush may turn things around. The annual budget of each year has a similar impact. The trial continued with the budget of FY-21 with the proposal of new policies and plans, the highlights of which we try to closely analyze and assess with a forward-looking approach for the overall economy.

Overview

A retrospective view of the past few years has brought the banking sector and PSUs into the mainstream to a higher degree than before. As per the budget of 2021, Finance Minister Nirmala Sitharaman unveiled the plans of divesting in all sectors barring four strategic areas. The government announced a budget of Rs. 1.75 lakh crore from the stake sale in public sector companies and financial institutions including 2 PSU (Public Sector Unit) banks and one insurance company in the next fiscal year. The move comes under the new PSE (Public Sector Enterprise) Policy unveiled in the current budget in the next fiscal year.  The policy would entail the strategic sale of IDBI Bank, BPCL, Shipping Corp, Container Corporation, Neelachal Ispat Nigam Ltd. being the inclusions up for sales by the end of the year beginning on April 1. The disinvestment target is lower than the last year’s target of 2.1 lakh crore.

Pros and Cons: A Brief View

The annual budget like any other aspect has its pros and cons. While there are moves that can be called for a positive catalyst for the economy, there are some areas that have still scope for the rework to be done.

The Pros

  • Constitution of ARC/AMC- Through the annual budget the government plans to work on the constitution of an Asset Reconstruction Company/ Asset Management Company. NPAs have been a burden on the economy, especially in the past few years. With a plan to subdue this burden to a different entity while the focus is kept on their reconstruction, the assets would be transferred and dealt with separately by a specially set up ARC/AMC done by an existing company in the business of ARC.
  • Deposit Linked Insurance Scheme- With an aim to restore the confidence of retail depositors in the banking industry an implementation framework would be in place whereby the depositors would be able to withdraw amounts up to 5 lakhs against their deposits. The success of this initiative would be directed by the seamlessness with which the deposit and withdrawal process continues.
  • Increase in FDI limits- With an increase in FDI limits, up to 74% in the insurance industry, the move is a welcome change as the control can rest between foreign JV partners with a dominance of specific safeguards such as the majority directors being Indian residents and 50% of the board comprising of Independent Directors.
  • Capital outlay for PSB revitalization- The budget entails an outlay of Rs.2000 crore to improve the financial health of the PSBs which would help in the further easy provision of capital during difficult times on the capital adequacy front. The privatization of banks would enable the other PSBs to gain an impetus for better performance and reflect a level of open-mindedness.
  • LIC (Life Insurance Company) IPO- The major move of the current budget is the disinvestment of the LIC and the decision of an IPO. The move would enable a significant cash inflow as well. The disinvestment being budgeted at Rs. 1,75,000 crores as per the budget. A discussion is also on the cards for the consolidation of the SEBI Act, 1992, the Depositories Act 1996, The Securities Contract (Regulations) Act, 1956, and Government Securities Act, 2007 into a rationalized single market code to streamline the multiple laws. The process would also lead to ease in implementation of the statute being easy from an administrative viewpoint.
  • Tax-related benefits-
    • Exemption of royalty income received from non-resident on account of the lease of aircraft paid by a unit in IFSC would be exempted from income tax in India
    • Investments in Unit Linked Insurance Plans (ULIP) would be taxable on maturity applicable on all policies taken on or after February 1, 2021. The move will create parity in terms of how mutual funds and ULIPs are taxed in the hands of the end consumer as an investment product.

The Cons

  • GST reduction on medical insurance premium- An area missed out in the budget would be not reducing the GST on the medical insurance premium, which was a major expectation of the industry. Given the fact that the budget gives maximum importance to Healthcare and wellbeing, a reduction of tax from 18% to 12% could have further benefited the insurance industry making the premiums more affordable
  • Rationalization in the tax rate for Indian branches of foreign branches- The foreign banks looked forward to a rationalization in the tax rates from the current levels. The taxes currently levied at 40%, if reduced to lower a level as applicable on the domestic banks in India could have been a major tax reform in the banking sector.

Editor’s Note- A verdict

A narrowed assessment of all the positives and negatives affecting the BFSI sector, and an aggregate analysis helps us understand some key points coming into the picture.

  • Catch up with the change- Privatization and disinvestments being some of the key components of the budgets indicate the need for the PSBs to accept the changes and also gain pace to function stronger than before. The decision will bring in more competition in the environment.
  • Insurance will be the key game changer- On being compared to other developed nations and the emerging economies like Thailand and the Philippines, India has lagged in the insurance industry. The penetration level and density of insurance are far lower when compared to other Asian countries. This will gain good momentum with a proposed increase in FDI limits at 74% and proposed IPO of for LIC. An additional focus on health and well-being may also drive more capital inflow into the sector.
  • Increased spending levels- The RBI has worked through the repo rates by reducing them and hence making a subtle nudge for the banks to increase the spending of the consumers. With a greater and more definitive role, the Banks will act in the direction of giving cheaper and more attractive loans than before hence acting as an incentive to spend more.
  • Close watch on the NPAs- With an agenda to strengthen the core of banks and their functionality, the budget aims to scrutinize closely the balance sheets through its move to implement a special body to watch the NPAs and work towards their reconstruction. This in turn would provide value to customers and shareholders of the banks

The budget can be an easy charter for the BFSI sector to the growth and development which can be a positive variable in the overall function of the growth of the economy.

Author: Mohd.Yusuf (Editor, TJEF)

Healthcare Sector

There are a lot of things that people wait for with baited breaths, but nothing in that list impacts their lives as much as the Union budget. There are generally always key focus areas that the budget presents every year and this year was no different, yet was historic. A sector that had never garnered enough focus was at the center-stage this year around- Healthcare has been at the center of all policy decisions due to the unprecedented medical crisis brought about by the ongoing pandemic. Dr. Prathap C Reddy, Chairman of the Apollo Hospitals Group, hailed this new outlook by the Government as “ground-breaking” and is optimistic that it will “fuel job creation and boost economic momentum”.

India has always been among countries that have the lowest healthcare budgets in the world. GDP percentages of Healthcare systems in India have consistently been below average and below recommended international guidelines by enormous margins. India’s healthcare sector only contributes to 1.3% of its GDP while the OECD countries have an average of 7.6% and even BRICS countries average of 3.6%. Even though the per capita government spending has almost doubled from Rs 1008 per person in FY15 to Rs.1944 in FY20 it’s a still low CAGR of 15%. Globally, Indians have the highest Out of Pocket Expenditure on healthcare.  

This year however there have been a shift in the outlook albeit triggered by the prolonged pandemic. There have been a few hits along with a few misses:

  • The Government has announced a total outlay of Rs.2,23,846 Cr for health and wellbeing which amounts to a 137% rise from the previous year. Budget conveyed that healthcare is a priority for the government.
  • Several schemes like the PM Atmanirbhar Swasth Bharath Yojana scheme has been announced, and they have an outlay of Rs 64180 crore that will be run along with the National Health Mission.
  • The PM Jan Arogya Yojana (AB-PMJAY) are also a part of the increased healthcare budget. Every year close to 5 crore families are pushed below the poverty line just to bear healthcare expenses. This Yojana aims at providing healthcare cover of up to 5 Lakhs per family per year.
  • A sum of 2.23 lakh crore is set to be spent on health care, of which 35000 crores is to be spent on COVID-19 vaccines alone.
  • The budget aims at boosting primary healthcare as well. The focus this time is not limited to rural development but it also looks at urban areas with plans of 17000 and 11000 health and wellness centers in the rural and urban areas respectively. Integrated public health laboratories and public health units are in plans of set up.

Amongst all the upsides and promises for a better tomorrow, there have been a few questions and expectations unanswered and unaddressed.

  • The primary need of the hour, the reason the pandemic caught us all off guard is the fact that R&D is not focused on enough. No schemes have been announced to increase R&D in government institutes, neither has R&D spending in private pharmaceuticals been incentivized in any way.
  • Advanced medicals devices are primarily imported into the country, no reduction in import duties have been announced.
  • The GST on Active Pharmaceutical Ingredient (API) is at the higher slab of 18%. This results in higher prices of the final product. Even though the reduction to 12% was anticipated and expected, the budget however did not reflect the same.

Nevertheless, despite all the shortcomings, the budget has been revolutionary in many ways. It reflects the changing mindset of the country where healthcare is steadily coming to the forefront. The COVID 19 provided the necessary impetus to focus on public health and the overall healthcare system. While it is evident that the steps are not enough to meet the colossal demand of healthcare and also meet the necessary OECD guidelines and other global standards, we still do have a long way to go.  This is year’s Budget comes as a welcome change in the right direction, in a country where healthcare has always taken the backseat. The pandemic seems to have caused a paradigm shift in  not only India but all over the globe.