The Budget adopts a fairly pragmatic approach: Business Line Feb 2 2020

It has not quite provided the stimulus that is needed for a growth boost

Budget 2020-21 raises some interesting issues, as it is based on several assumptions. Further, there has been some fine-tuning of numbers to ensure that the final fiscal ratios are more acceptable. The first point that strikes the observer is that the Budget has not quite provided a stimulus that was expected on the expenditure side, and the fiscal deficit has been contained at 3.5 per cent for the coming year. While it is higher than the 3 per cent target, the overall size of the Budget has been retained at the normal growth of 10-12 per cent over FY20. It was expected that to get a demand stimulus, the government would earmark additional 0.5 per cent of the GDP for additional capex, which could provide the big push.

Second, the Budget has assumed growth of 10 per cent in GDP, which was expected after the Economic Survey projected 6-6.5 per cent in real GDP for FY21. However, this would mean that the tax revenue targets have to be monitored continuously, given the slippages that took place in FY20 for corporate, customs and the GST. Growth in imports has been negative, while consumption has slowed down, which means that tax collections got affected in FY20. Also, the Budget assumes that corporate tax collections will increase on a higher base, which is going to be challenging given the lower rate of tax.

Third, the Budget has placed quite a bit of dependence on non-tax revenue which is not on the dividend side (RBI surpluses) but on telecom revenue, which is to increase by around ₹70,000 crore. Here it is assumed that the arrears and penalties that the telecom companies have to pay to the government will come through, and there would be no further delays.

Fourth, the disinvestment target has been placed for the year is quite ambitious at ₹2.1 lakh crore, of which ₹90,000 crore will come from the financial services segment involving LIC and IDBI Bank. Further, the Air India and BPCL sales would be the two big-ticket ones that have to materialise. The jump from ₹65,000 crore is ambitious and if it works out, would provide a major fillip to the stock market.

Tracking expenditure

While these assumptions are quite aggressive, on the expenditure side too, there are some interesting developments. The first is that the debt issue is telling on the Budget in terms of interest payments, which have increased sharply by ₹83,000 crore. While the government has been borrowing at levels equivalent to the previous years, the fact that interest payments have now touched around ₹7 lakh crore in a Budget size of ₹30.4 lakh crore is serious. This is indicative of the strong need to keep the fiscal deficit under check. The practice of issuing recap bonds too has shown its face in this large interest payment outgo of the government.

Second, the government’s action on the farming sector has been ambivalent. On the PM-Kisan scheme, the disbursement has been lower by around ₹21,000 crore in FY20, though the target has been maintained at ₹75,000 crore for the next year. This really means that there could also be some cuts next year in case the need arises.

Further, for NREGA, the expenses increased from ₹60,000 crore (B) to ₹71,000 crore in FY20 (RE), but has been rolled back for FY21 to ₹61,500 crore. It does appear that the government would be capping the overall social spending and there would be distribution of funds across schemes depending on the exigency.

On the positive side, there does appear to be a move towards rationalisation of subsidies in a minimalist manner. Food subsidy came down sharply in the revised estimate by almost ₹76,000 crore, and while this could be due to the DBT, there could have been a major rollover of the same. The accounts for April 2020 will reveal the extent to which this has happened.

The income-tax cuts could actually mean higher flows for those in the higher income groups, and may not necessarily fire consumption. The assumptions are a bit bold, but as the revealed preference is for fiscal discipline, expenditure cuts may be expected if the GDP growth number does not materialise.