Budget 2020: An immediate demand revival is unlikely

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Published: February 5, 2020 2:00:28 AM

Budget 2020 India: The government’s projected receipts from disinvestment have been scaled up significantly to Rs 2.1 lakh crore.

Moreover, there are concerns on the achievability of the fiscal deficit target of FY2021, given the somewhat aggressive revenue assumptions.Budget 2020-21: Moreover, there are concerns on the achievability of the fiscal deficit target of FY2021, given the somewhat aggressive revenue assumptions.

Union Budget 2020 India: As broadly anticipated by the markets, the Union Budget for FY2021, presented by finance minister Nirmala Sitharaman on February 1, has targeted a sharply higher fiscal deficit of 3.5% of GDP for the coming fiscal, relative to the rolling target of 3.0% of GDP that had been set in July 2019. There are several well-intentioned schemes that have been announced across diverse sectors such as agriculture, irrigation, infrastructure and solar power. However, the proposals made in the Budget may not be able to trigger a substantive revival in demand in the immediate term. Moreover, there are concerns on the achievability of the fiscal deficit target of FY2021, given the somewhat aggressive revenue assumptions.

Small and medium enterprises have been an area of focus in the Union Budget for FY2021, with invoice financing by non-banking financial companies through the Trade Receivable Discounting System (TreDS) platform, provision of subordinate debt fully guaranteed through Credit Guarantee Trust and allowing banks to restructure loans up to March 31, 2021, subject to concurrence by the Reserve Bank of India. Customs duty has been increased on several items to enhance the competitiveness of Indian manufacturers. Moreover, the increase in foreign portfolio investment limits on corporate bonds, hike in deposit insurance, proposed launch of exchange traded funds in government securities and full tax exemption to sovereign wealth funds for investment in the infrastructure sector are positives.

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However, the overall increase in the fund allocations for various sectors have been modest, given the fiscal constraints. Even as the budgetary outlay for capital expenditure for FY2021 has been enhanced by a healthy 18% or Rs 63,200 crore, this is partly offset by a disappointing reduction of Rs 37,900 crore in the internal extra budgetary resources in the FY2021 budget estimates relative to the FY2020 revised estimates . Overall, the increase in the capital outlay is muted relative to the requirement under the ambitious National Infrastructure Pipeline, which targeted a combined investment of Rs 19.5 lakh crore in FY2021 by the Centre, states, and private sector. However, with over Rs 3.5 lakh crore of capital infusion into the public sector banks over the last five years, no additional capital provision has been indicated in the Union Budget for FY2021, which is in line with our expectations.

In our view, the income tax cut in the lower slabs may only have a marginal impact in terms of increasing disposable income and boosting consumer sentiment. There are apprehensions that the withdrawal of exemptions on tax saving schemes in case of opting for lower income tax rates could impact the fund flows to insurance and mutual funds.

In addition, there are concerns on the achievability of the fiscal deficit target for FY2021, particularly related to the projected growth in the government of India’s tax revenues, and the doubling in the non-tax revenues expected from other communications services to Rs 1.33 lakh crore in the budget estimates for FY2021 from Rs 60,000 crore in the revised estimates of FY2020.

Furthermore, the government of India’s projected receipts from disinvestment have been scaled up significantly to Rs 2.1 lakh crore in FY2021 budget estimates from Rs 65,000 crore in FY2020 revised estimates. A pipeline of announcements, including the planned initial public offering of Life Insurance Corporation, provides some visibility for raising funds from this source. However, unless sizeable disinvestment proceeds are raised in the first half of FY2021 itself, the credibility of the fiscal correction being targeted by the Indian government in FY2021 will weaken, which may well result in hardening of yields on government securities.

The author is Principal Economist, ICRA

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