The budget speech read out by the FM was long in duration. However, it falls short of what is required to revive the investment climate and growth.
By M Govinda Rao
The budget this year was presented against the backdrop of a slowing economy, poor investment climate, declining consumer demand and stagnant exports. The steady deceleration in growth (4.5%) in the second quarter of the current fiscal—the lowest in the last 26 quarters—presented a challenge as well as an opportunity to steer the economy out of the distress. The monetary policy has reduced the repo rate by 135bps since January last year. The budget provided a great opportunity to propel the economy, to lift consumption demand, revive investment climate and accelerate growth by initiating structural reforms. The hope was further rekindled as the Economic Survey that preceded the budget presentation made a reasonably objective analysis of the slowdown, and stated, “the government must use its strong mandate to deliver expeditiously on reforms, which will enable the economy to strongly rebound in 2020-21”.
Although over the years, there have been differences in the focus of the Economic Survey and the budget, the disconnect is even wider this year. The Survey makes a detailed analysis to identify the causal factors and states, “a sharp decline in real fixed investment induced by a sluggish growth of real consumption has weighed down GDP growth from H2 of 2018-19 to H1 of 2019-20”. The Budget speech, on the other hand, states, “the fundamentals of the economy are strong and that ensured macroeconomic stability”. Not surprisingly, when the existence of the problem itself is denied, it is difficult to find solutions.
The budget speech was long in duration, running over two and a half hours until the FM could not carry on any longer. Unfortunately, it fell short of what is required to revive the investment climate and growth. In fact, most of what she read in Part A was related to the subjects that come within the Constitutional domain of the states, and the action will have to be taken by them. Even on subjects like agriculture, irrigation and rural development, a careful analysis reveals that the allocations seem higher mainly in relation to the sharply reduced expenditures in FY20. Not surprisingly, the market response to even measures like increase in insurance cover for bank deposits, reduction in individual income tax rates and abolition of dividend distribution tax was not enthusiastic.
It was hoped that there will be a substantial increase in infrastructure investment that will trigger investment demand, but the actual allocations are not promising. This was particularly after the recent announcement that there will be an investment of Rs 103 lakh crore in the next five years to leapfrog towards a $5-trillion economy. Much of the investment for this will have to be made by the private sector, and, it is hoped that the allocation of Rs 20,000 crore equity in specified infrastructure finance companies will help them to leverage more than Rs 1 lakh crore investment support.
The budgetary allocation for capital expenditure in FY20, which is estimated at 1.7% of GDP this year, is budgeted at 1.8% for FY21, not very different from the past trend. There was a 16-point action plan on agriculture, irrigation and rural development, and the budgeted Rs 2.83 lakh crore allocation is higher than the budget estimates for the previous year by just 2.5% and revised estimates by 13.2%. In other words, the allocation looks impressive only because there was a massive cut (Rs 26,000 crore) in the budget estimates over the revised estimates.
Similarly, the allocation to transport infrastructure in the budget at Rs 1.7 lakh crore is just 7.6% higher than the revised estimate for FY20. Not much is expected in terms of propping up the consumer demand as well as the allocations to sectors like MGNREGA, which has been cut from Rs 71,002 crore (RE) in the current year to Rs 61,500 crore in FY21, and to schemes like PM Kisan Samman Nidhi, it is just as much as it was budgeted for FY20.
The slippage in fiscal deficit from the target set in the budget estimate in FY20 was very much expected. This is mainly due to, (i) the nominal GDP growth being 7.5% as against the estimated 12% in the budget; (ii) overestimation in the growth of tax revenue at 18.3% over the pre-actuals of the previous year; and (iii) the slippage in achieving the disinvestment target of Rs 1.03 lakh crore. It is not surprising that the fiscal deficit for the current year is estimated at 3.8% of GDP, and for the next year at 3.5%. The major concern is the reported off-budget financing, which is almost 0.85%. This does not capture the bills and refunds payable by the government. There are also questions about whether the revised and budgeted estimates would be realised. The disinvestment revenue is estimated at Rs 65,000 crore, though the realisation so far has been just Rs 18,000 crore, which implies another Rs 47,000 crore will have to be mobilised in the next two months. Also, the revised estimate of tax revenue for the current year is over 14% higher than the actual for FY19. And, this is perhaps predicated on the hope from the scheme, Vivad se Vishwas, which allows the settlement of disputed tax to be paid without interest and penalty.
On the tax reforms, while the abolition of dividend distribution tax was expected, the reforms in individual income tax complicate matters by creating six tax brackets. The best practice approach to tax reform is to broaden the base, reduce the rates and reduce the number of brackets to make it a simple tax. Clearly, the main objective of any tax is to raise revenue. The government could have simply phased out the tax concessions, indexed the brackets for inflation and reduced the rates of tax with an appropriate adjustment in the brackets. Raising of customs duties is clearly retrograde. Rather than integrating the economy with global value chains and making them competitive, it takes us back to the import-substituting era in the name of “Make in India”.
The impact of fiscal developments on the states’ finances is clearly adverse. The shortfall in tax devolution in FY20 from the budgeted amount works out to Rs 1.53 lakh crore, and total shortfall in transfers amounted to Rs 1.41 lakh crore. Besides starving off funds for various projects, this has serious repercussions on the budget management at the state level. It seems the wait for rescue for the slowing economy has become longer.
Former director, NIPFP and member, 14th Finance Commission. Views are personal