By Ananth Narayan
Union Budget 2019 India: In presenting her maiden Budget, Nirmala Sitharaman faced daunting challenges. First, the fiscal balance she inherited is worse than is acknowledged. Second, she had expensive promises of additional spending to keep. Third, the economy is hurting, and crying for relief and reform.
In this context, the FM presented an extensive Budget that covered several areas. Two key takeaways are the steps announced around financial services ecosystem, and the second would be on the budget math.
For domestic entities, the FM announced provision of `70,000 crore of additional growth capital for PSBs, and a liquidity window of `1 lakh crore against a pool of NBFC assets, with the government providing first loss credit guarantee of 10%. Following this, RBI announced it would incentivise banks to lend up to `1.35 lakh crore to NBFCs. The FM also announced steps designed to deepen debt capital markets.
These will provide relief to the beleaguered financial services ecosystem. One hopes these will be accompanied by banking sector reforms, along the lines of the PJ Nayak committee recommendations. Likewise, hopefully, the government will consider a solution to the outstanding stock of stressed assets, so that banks and NBFCs can concentrate on financing the next investment cycle.
The FM also announced steps to attract FDI, including ease of doing business for FDI and FPI, and the major policy pivot to issue India’s maiden sovereign bond. While the sovereign bond issuance will be hotly debated, I believe that it is a good idea. In moderation, say up to 5% of total outstanding government of India debt, such sovereign issuances should be useful. They will draw in foreign savings at a good rate, free up domestic savings to be channelled into productive private investments, and establish a benchmark that would help price discovery for other corporates tapping overseas credit markets.
The Budget math leaves us with more questions than answers. The total revenue at the Centre is projected to grow by 25.6% in FY20, over provisional FY19 numbers. In contrast, FY19 revenues grew by just 8.9% over FY18 numbers. Given that tax collections continue to disappoint, these revenue projections for FY20 do appear to be optimistic.
While the focus on divestments, the possibility of additional payments from RBI via the Bimal Jalan committee recommendations, and improvements in GST collections could help the revenue cause, the overall real fiscal deficit could be higher than budgeted. The FY19 fiscal deficit appears to be suppressed, with expenditures such as food subsidy and payments to FCI and other public sector entities being taken off-balance sheet. We may have to continue in the same vein to maintain the headline fiscal deficit for FY20 at the budgeted level.
(The author is Professor, Finance, SPJIMR)
