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Context

The disconnect between Budget and Economic Survey is much greater this year.

Background of the economy as the budget is introduced

• The 2020 Budget was presented against the background of-
  • Slowing economy.
  • Poor investment climate.
  • Declining consumption demand and
  • Stagnant exports.
  • The steady deceleration in growth, which registered at 4.5 per cent in the second quarter of the current fiscal — the lowest in the last 26 quarters — presented a challenge as well as an opportunity.

Infrastructure investment

• The hope of substantial increase in allocation for infra: The hope was that there will be a substantial increase in infrastructure investment, which in turn will trigger investment demand, but the actual allocations are not promising.
  • This was particularly surprising in the wake of the recent announcement that there will be an investment of Rs 103 trillion in the next five years to leapfrog India to a $5-trillion economy.
  • Private sector expected to contribute: 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 in equity in specified infrastructure finance companies will help them to leverage more than Rs 1 lakh crore of investment support.

Budgetary allocation for capital expenditure

• 1.7% of GDP to 1.8 %: The budgetary allocation for capital expenditure for the current year, which is estimated at 1.7 per cent of GDP this year, is budgeted at 1.8 per cent in 2020-21.
• Agriculture, irrigation and rural development: The Budget also contained 16 action points on agriculture, irrigation and rural development and the Rs 2.83 lakh crore allocation is higher than the budget estimate for the previous year by just 2.5 per cent and revised estimate by 13.2 per cent.
  • But the allocation looks impressive only because there was a massive cut (Rs 26,000 crore) in the budget estimate over the revised estimate.
• Transport infrastructure: The allocation to transport infrastructure in the Budget- at Rs 1.7 lakh crore-is just 7.6 per cent higher than the revised estimate for 2019-20.
• MGNREGA and PM-Kisan Samman Nidhi: The allocations to schemes like the MGNREGA has been cut from Rs 71,002 crore (RE) in the current year to Rs 61,500 crore in 2020-21.
  • PM Kisan Samman Nidhi: For schemes like PM Kisan Samman Nidhi, it is just as much as was budgeted for 2019-20.
  • As a consequence, not much is expected in terms of propping up the consumption demand.

Slippage in fiscal deficit

• Increase in fiscal deficit expected: The slippage in fiscal deficit from the target set in the budget estimate in 2019-20 was expected for the following reasons-
  • Below expected nominal GDP growth: Nominal GDP growth was 7.5 per cent as against the estimated 12 per cent in the budget.
  • Overestimation in the growth of tax revenue at 18.3 per cent over the pre-actuals of the previous year.
  • Missed disinvestment target: The slippage in achieving the disinvestment target of Rs 1.03 lakh crore.
• Thus, it is not surprising that the fiscal deficit for the current year stands estimated at 3.8 per cent of GDP and for the next year at 3.5 per cent.
• Off-budget financing: The major concern is that the reported off-budget financing is almost 0.85 per cent. This does not capture the bills and refunds payable by the government.

Would the budgeted and revised estimates realise?

• On disinvestment front: 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.
• On tax revenue front: The RE of tax revenue for the current year is over 14 per cent higher than the actual for 2018-19.
  • This is perhaps predicated on the hope that the scheme, “Vivad se Vishwas”, which allows the settlement of disputed tax to be paid without interest and penalty.

Tax reforms in the budget

• DDT abolition: On tax reforms, the abolition of dividend distribution tax (DDT) was expected.
• Complicating Income tax: The reforms in individual income tax complicates the tax by creating six 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.
• What could have been done? 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.

Conclusion

The impact of fiscal developments on the states’ finances is clearly adverse. The shortfall in tax devolution in 2019-20 from the budgeted amount works out to Rs 1.53 lakh crore and the total shortfall in transfers amounted to Rs 1.41 lakh crore. Besides starving funds for various projects, this has serious repercussions on budget management at the state level.

Context

The Budget was a workmanlike exercise, more a statement of account, around which was woven many strands of intent and vision, which, read in its entirety and by connecting interlocking dots, framed a strategy of moving towards a $5 trillion economy over the next five years.

Fiscal arithmetic of the Budget

• A clearer picture of off-balance-sheet borrowings: To a large extent, the Budget has done this, giving a much clearer picture of the off-balance-sheet borrowings, which add to the government’s debt and its obligations to pay.
  • Increasing the credibility of government: This move will enhance credibility among the investor community while taking decisions on committing capital for India’s future.
• Possibility of nominal 10 % growth: The nominal growth projected for 2020-21 at 10 per cent is feasible, with a stretch, given the expected rise in inflation, which will add around 4 per cent to a projected 6 per cent real growth.
  • Aggressive revenue projection: The revenue projections are more aggressive, assuming a buoyancy which can be attributed in large measure to checking evasion using data analytics.
• Disinvestment and privatisation revenue: The major boost to revenues is expected from disinvestment and privatisation of central public sector enterprises, together with asset monetisation.
  • The target is up sharply to Rs 2.25 lakh crore.
  • This initiative has been one of the core focus areas of the government, has to be lauded for-
  • The effects of increasing efficiency in operations and-
  • Restricting the losses to the public balance sheet.
  • Disinvestment revenues are likely to be augmented with higher dividend receipts, including, from higher profits of the Reserve Bank of India.
• Optical allocation by the Govt.: Spending, which depends on revenue collection, has also been optimally allocated, with capital expenditure budgeted to increase faster than revenue.
  • High revenue expenditure: Capital expenditure is still a much smaller fraction of total expenditure compared to the committed revenue spending on interest payments, salaries and pensions and subsidies.

The slowdown in the economy and squeeze in the credit flow

• Three aspects of the current slowdown that makes it different
• First– Multiple engines of growth have synchronously decelerated-
  • Consumption, investment, exports and sporadically, government spending — compared to earlier ones when one or some of these drivers were still functioning
• Second- Demand led slowdown:
  • This is more a demand-led slowdown, versus the earlier ones, which tended to originate with a supply shock, whether from oil or foreign capital.
• Third– the trigger for this episode was a financial shock-
  • NBFC lending — which tipped the weaknesses building in the system into deep deceleration.
• Squeeze in the credit flow of the banks
  • Drastic reduction in credit flows: A telling statistic released by the RBI shows that compared to Rs 8 lakh crore of loans provided to borrowers during April-September 2018, credit flow fell to Rs 90,000 crore in the six months of 2019.
  • MSMEs worst affected by the credit squeeze: Bank credit has continued to remain very weak. In the context of the broader slowdown, credit to micro, small and medium enterprises (MSMEs) has been one of the worst affected.

Whether the slowdown is more cyclical or structural-conundrum for policymakers

• If it is more cyclical, aggressive use of monetary and fiscal counter-cyclical policy could yield the desired result.
  • If not, then the wait is likely to be longer and will involve more sector-specific de-bottlenecking initiatives.
• Signs of structural constraints: While there is certainly a cyclical component in the manufacturing segment- the proximate source of the slowdown- there are signs of deeper structural constraints.
• Quintuple problem– This problem has now expanded into almost quintuple problems, encompassing the government, households, NBFCs along with the banks.
  • Overlaid on these structural impediments is a sharp weakening of consumer, investor and corporate confidence.

Conclusion

Implementation, as always, will be key to achieving the $5-trillion goal. The arena for the next set of reforms and actions for sustained growth is at the state level: Agriculture, land, electricity, and even labour. The Budget acknowledges this. A federal approach to tackling the slowdown, in a coordinated fashion, will probably be the most effective.

Context

The Budget can be judged in terms of its effect on rural demand, investment and private sentiments– all critical elements for recovery. While the Budget offers hope on the last count, it leaves much to be desired on several other parameters.

Skill development allocation- 3000 Crore

• Unmet Demand: There is a huge, unmet demand for teachers, paramedical staff and caregivers, and skilled workers.
  • Need for quality education and skills: Well-paying jobs are created in the organised services and industry but require candidates with quality education and skills.
  • Both elude India’s youth due to the poor quality of education and lack of opportunities to acquire practical skills.
  • Skilling will require massive investment and concerted efforts.
  • What could have been done? The Budget could have given tax incentives to companies to provide internships and on-site vocational training to unemployed youth.
  • The country cannot afford to let the world’s largest workforce waste this way.

On flagship welfare schemes

• The MGNREGA is allocated ₹61,500 crore, which is less than ₹71,000 crore for the current fiscal year.
• PM-KISAN: Going by the last year, disbursement under the PM-KISAN will also be less than budgeted, unless the beneficiary base is expanded.
• Good schemes for increasing demand: These two schemes are good instruments for income transfers to small and marginal farmers, landless labour who spend most of their income and generate demand for a wide range of goods and services.
  • Higher disbursement under these schemes would have benefited most sectors of the economy. Budgetary allocations for health and education are also well below what is needed.
• Micro-irrigation schemes for 100 water-stressed: Focus of schemes such as micro-irrigation schemes for 100 water-stressed districts is welcome and so is a modest increase in allocations for agriculture and rural development schemes.
• Rural roads, cold storage, and logistical chains are crucial for the growth of income and employment in rural India, as the multiplier effects of rural infrastructure investment on growth and employment are large and extensive.
• ₹1.7 lakh crore for transportation infrastructure: The allocation of ₹1.7 lakh crore for transportation infrastructure is also a welcome step. If the public investment infrastructure actually materialises, it will lend credence to the government’s stated commitment to revive the investment cycle –to spur job-creating growth.
• To pull in private investment, public funding should be front-loaded in under-implementation projects.
• Small irrigation and rural road projects are also relatively easy to complete and deliver immense benefits to several sectors.

 Bonds Market development  and startups

• Need for the corporate bond market: The fundamental problem of infrastructure finance is the asset-liability mismatch which can be addressed only by developing a vibrant ‘corporate bond market.
• No focus on the corporate bond market: The focus of the Budget is the multiple schemes for government bonds mainly through additional room for foreign portfolio investors and exchange-traded funds in government bonds.
  • Need for the well-developed market: Government’s moves are welcome but not enough. A well-developed bond market should draw upon-
  • Domestic insurance funds.
  • Pension funds and
  • Mutual funds-which are capable of investing in corporate bonds across different schemes.
• Startups: The other leg of the “aspirational” Budget is the startups.
  • Some relief on the tax they have to pay and on taxation of the Employee Stock Option Plans is welcome.
  • Reluctance to abolish angel tax: But the reluctance to abolish the angel tax that results in harassment of start-ups and their investors is unfathomable.

Scheme for NBFC

• Allowing NBFCs into TReDS: Another welcome feature is the scheme to allow the non-banking financial companies into the Trade Receivables Discounting System (TReDS).
  • TReDS is an ecosystem that aims to facilitate the financing and settling of trade-related transactions of small entities with corporate and other buyers, including government departments and public sector undertakings.

Changes in provisions for SMEs and their problems

• Audit threshold increased to 5 crore: To reduce the compliance burden on small retailers, traders and shopkeepers who comprise the Small and Medium-sized Enterprises (SMEs) sector, the threshold for audit of the accounts has been increased from ₹1 crore to ₹5 crores for those entities that carry out less than 5% of their business transactions in cash.
• Restructuring window increased: A provision in the budget extended the window for the restructuring of loans for micro, small and medium-sized enterprises till March 31, 2021.
• Problems faced by the SMEs
  • Input tax rate higher for input than for the final goods: For many products produced by these enterprises, the tax rates are higher for inputs than the final goods.
  • High taxes on imports and exports: In addition, many SMEs suffer from high taxes on imports of raw material and exports of intermediary services by them.

Other provision made to revive the private sector 

• Recognising the need to revive the dying spirit of the private sector, several provisions have been made in the budget to revive the spirit of the private sector like-
  • Decriminalisation of several civil offences by firms under the Companies Act.
  • The abolition of dividend distribution tax (DDT).
  • The assurance that tax-related disputes will be considered with compassion.
  • The scheme to reimburse to exporters assorted duties, such as excise duty on transport fuels and electricity.

Conclusion

Everything considered the future of the economy will turn on whether the government delivers on the promises of public investment and the promises made to different sections of society including the taxpayer and companies. When it comes to reviving private sentiments, actions will speak much louder than the budgetary promises.