Why individuals don’t like Budgets: Business Line 11th Feb 2020

The changes in the tax system that are introduced in every Budget — the latest examples being the DDT abolition and new tax slabs sans exemptions — leave individuals scrambling to adapt and plan their financials for the future

There is an argument that Budgets are generally framed keeping in mind the lower income groups — which is ‘populist’ — and corporates, on the assumption that they bring about growth. Arguably, there could be some merit here.

Individual taxpayers are at the receiving end of tax reforms, which tend to be skewed against them. In the last five years or so, the changes in the tax structure that affect individuals have been quite demanding; and with the tax environment increasingly becoming volatile, it is also hard to take a decision on savings and investment. Most of these changes have been justified as following the principle of a ‘level playing field’, which is the clinching argument.

Change in criteria

First, individuals had to face the wrath of the imposition of LTCG on debt investments, where the fixed maturity plans (FMPs) were affected. From a situation where one year considered as long term, overnight, the criterion was changed to three years. As a result, there was a high tax outflow; and since the tax was imposed with a retrospective effect, it impacted past decisions taken.

Second, the LTCG on equity was introduced with the one-year condition, but an imposition of 10 per cent tax on gains. This time, however, there was a grandfathering clause which provided some relief to investors. There was also a condition that if LTCG was less than ₹1 lakh in a year, the gains would be exempted. Given the way tax rules are changing, it is a matter of time before this will be withdrawn, as the logic of the ₹1-lakh cap can be questioned at any time. Also, on grounds of a level playing field, there is nothing to stop future budgets to extend the time period of LTCG to three years for equity, as was the case with debt.

Structural reforms

Third, the biggest blow for individuals is the change in the dividend distribution tax (DDT). By abolishing the DDT, companies are better off, but it is very unlikely that they will pay higher dividends on the savings from this score. Now with the dividend being taxed at the level of the individual, it would generally mean a higher outflow. While it is said that the lower income groups will benefit, it would be naïve to accept that they are the big investors in the mutual funds or equity markets.

While this is the first loss for households, the second is in terms of planning for the future. Individuals who go in for dividend schemes do so on the premise that there will be a steady flow of income in future. The DDT was a notional loss for them, as higher tax, when paid, enters the financial ratios of the company but does not affect the shareholder in the real sense. Ideally, such a rule should apply for fresh investments made post-April 2020, like the grandfathering clause allowed for LTCG on equity gains.

Fourth, the new lower income tax slabs announced, which go with the removal of around 70 of the 100 exemptions that are currently available, is optional today. However, in subsequent interviews it has been clarified that this would soon cover all individuals, with all the exemptions removed. The ‘choice’ given today can be looked at as temporary. This raises an interesting question on the exemptions.

Exemption logic

All exemptions have been provided for a rational economic purpose. Interest on home loans was to enable people to borrow money to buy a house; Section 80C was to encourage savings for the long run, like with PPF or certificates; those on pension were to fill a lacuna for the absence of a social safety net in the country; health insurance is to ensure that individuals protect themselves, and so on. By removing these exemptions, all plans of individuals are disrupted and their purpose that was to be served.

The argument all along is that there has to be a level playing field and that tax laws have to be steered towards the direction of ability to pay. Higher income groups can pay higher tax and do not require benefits. In fact, even during debates on small savings, it is stated that as long as their returns are high, banks cannot lower their deposit rates. This has also been expressed in the Credit Policy Statement on February 6.

Interestingly, the size of the deposit component of small savings was around ₹6 lakh crore as of March 2019, of which time deposits were ₹1.2 lakh crore; bank deposits amounted to ₹129 lakh crore, of which ₹110 lakh crore were time deposits. Clearly, the argument that deposits would move from banks to small savings is not convincing.

The curious part here is that as people move away from small savings once exemptions are withdrawn, the government may find itself in trouble, as the NSSF provides a lot of support to maintain the government’s fiscal deficit. If people stop saving in these instruments, then the government will be forced to borrow from the market. Hence, small savings are important not just from the point of view of individuals, but also for the fiscal ecosystem. The government relies on this source (which will contribute 30 per cent in FY21) to ensure that there is no turbulence and crowding out in the financial market due to excessive market borrowings.

The main takeaways here are that individuals have consistently been at the receiving end of budget after-effects; this is one category which never can ‘manage’ the tax system as there is an audit trail for every transaction and there are no ‘escape clauses’, like the ones available for corporates. Second, it is hard to plan for the future when the tax regime changes continuously — it is a kind of regulatory risk. Third, rather than just withdrawing exemptions in a robotic manner, the ethos behind each one needs to be analysed before taking a decision. This would be a more just way of handling tax systems.

LIC disinvestment: Blending ideology with the market Financial Express Feb 13 2020

With LIC being out for disinvestment via an IPO, this means the institution would become a company that will require needed regulatory changes.

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LIC has as asset base of Rs 36.7 lakh crore, and involves 22 lakh agents and a staff of 2.85 lakh. It has 11,280 branches across the country.

The Union Budget may not have transcended the fiscal clichés that go with such announcements, but the point made on disinvestment of the Life Insurance Corporation of India (LIC) will go down as the big story to track during the year. LIC has been the star of government-owned institutions, and has continuously been the bastion of security and assurance for a myriad of policyholders. In fact, it cannot be denied that when a policy is due for redemption, no other company makes the effort to trace the policyholder as much as LIC does! Such is the reputation of LIC that any talk of any kind of disinvestment makes for a big story.

There are evidently arguments on both sides on whether such a disinvestment is required or not, but that is not really the point here. It may be assumed that this has been worked out by the finance ministry and an informed decision has been taken based on such evaluation. As it has been stated that there will be disinvestment, the storyline that develops would be important.

The next is whether this would be a one-shot affair, or if this would be of the crawling variety where the government will lower its stake till 51% and reap the benefits of providing support to future budgets? Logically, it should mean further such measures over the years, or else the motivation would look like as being only garnering revenue and not moving towards a changed business model. This has been the case for several PSUs where buyers have been found even while the government nature of the company remains. Therefore, it is possible that this could also be the case with LIC.

Third, with LIC being out for disinvestment via an IPO, this would mean that the institution would become a company that will require the needed regulatory changes. But the focus would automatically change—once a company is listed, the financial performance will matter and the profitability ratios as well as capital and NPAs will surface for discussion. In fact, the quarterly syndrome of continuously reporting higher earnings will become a goal in itself, and the nature of the business can change gradually in tandem with private ownership share from being a company run for the ‘policyholder’ to one ‘for the shareholder’. Benchmarking with other private firms cannot be eschewed, and there will be greater focus on disclosures and transparency.

Fourth, the amount being spoken of would be very high and could be anywhere in the range of Rs 70,000 crore to Rs 80,000 crore, assuming the balance would be for the other financial institution. The question is, can the market absorb such a large stock of capital? The highest amount raised so far was Rs 3.13 lakh crore in FY18. If Rs 90,000 crore has to come from the market along with a part of the balance Rs 1.15 lakh crore of other disinvestment for this year (a total of Rs 2.1 lakh crore has been budgeted), the demand on the market would be immense. There would also be the issue of FPIs being allowed here, which would add another dimension. FPIs have been quite dormant in the equity segment since 2014-15 when around $18 billion came in (or Rs 1.25 lakh crore). But this rather large amount from one issue will challenge the market for sure, and the timing has to be right to be successful.

Fifth, from the point of view of the government, it will continue to be the owner at this stage with all policyholders having the sovereign guarantee. For interest in the IPO, investors may see what the future plan would be like, especially so in terms of control. This is important because LIC has always played the role of investor of last resort in the disinvestment programmes of the government in the past. Therefore, whenever the government wanted to disinvest in a PSU where there were limiting factors such as timing, valuation, type of sale, etc, LIC was always there to buy the stock and transfer the funds to the government. Once LIC gets listed, this flexibility may not remain as shareholders would question every such investment, especially of PSUs that are not doing well in terms of profitability. The puzzle will unfold when LIC is listed, because even if the government has a majority stake, the market will not take kindly to such investment that become big news. This is something the government has to be prepared for.

Sixth, the timing of this announcement has a bit of irony because the recent Union Budget has brought in a new personal taxation system that will be without any exemptions of certain savings, which include insurance. The peculiar part of insurance is that while life cover is the main goal, it is often taken for two major reasons, besides the contingency of death. The first is to get a steady return periodically as per the policy, which goes with tax benefits even if it is not too attractive. The second is tax benefits under Section 80C. In fact, the latter actually pushes up the effective return on insurance products. With the finance ministry indicating that in due course of time the ‘option’ to join the new income tax scheme will not be there, the new scheme does militate against savings and insurance—both life and non-life can get impacted as people do not get the tax incentive.

Last, given the track record of large disinvestments, the practical question is whether or not this can be accomplished in 2020-21 as there are several processes to be followed before coming out with the issue? Also, given that it would be the first of its kind, there could be opposition from various quarters, leading to delays. Several large disinvestments have gotten held up on account of these factors. As the amount expected from this sale is large, non-accomplishment would mean a significant impact on fiscal balances as these account for about 3% of total receipts that have to be compensated through other measures. Considering that there have been sharp tax shortfalls in the last two years and that the economy is expected to gradually improve and not register a V-shaped recovery this year, the budgetary implications can be serious.

Disinvestment in LIC is a very big story that will lay the template that can be followed for other such great institutions. It does seem as if a blending ideology that caters to the people with market flavour will be the new offer at the disinvestment parlour for sure

Budget 2020: Spelling reforms for the financial sector: Free Press Journal 2nd Feb 2020

Given the importance of the financial sector in bringing about growth in the economy, the Budget has addressed some critical concerns though admittedly these measures would take time to work out though the year as they do not always involve direct allocations.

First, the FM has indicated that some of the PSBs may be accessing the market for capital. This is significant as it indicates not just the funding aspect but also a move towards letting go of equity. This can be a precursor to disinvestment taking place through the back door. One can guess the banks involved would be the better performing ones which command a good price. Interestingly the Budget also talks of the government selling its stake in IDBI Bank, presently owned by LIC, and hence does not make too much of difference in terms of ownership.

Second, it is comforting to know that the government has in place a mechanism to track the health of the commercial banks. This is important because the recent episode of NPAs in banks did cause some concern not from the point of view of deposit holders but the system as a whole as such problems do take time to build up and clearly there was no system in place to provide these signals. One would hope that this gets extended also to the cooperative banks and NBFCs (the Economic Survey has spoken of a ‘health card’ for them) which tend to be more vulnerable than commercial banks which have stronger regulatory oversight.

Third, increasing the deposit insurance cover to Rs 5 lakhs is very positive for the deposit holders especially it comes at a time when there has been an aborted attempt to make deposit holders also liable for the defaults of borrowers. The cost of insurance will increase for banks on this score as the cover is higher, but would help to strengthen the confidence levels in banks. This was required post the PMC fiasco when this issue surfaced. Otherwise scant attention has been paid to deposit insurance as it is always assumed that the government and RBI will bail out failed banks, which has been the case so far.

Fourth, the lowering of limit for NBFCs to qualify for debt recovery under SARFESI is again another step taken for helping out this sector. This should make NBFCs also come into this ambit and with the loan threshold being reduced this will help to clean their balance sheets.

While these steps have been taken at the institutional level, the future of funding in the country would be in the bond market on which several steps have been taken by the government over time. This time there is widening of the scope for FPIs to invest from 9% to 15% of outstanding debt. This would help in a limited way though admittedly the FPIs have not fully utilized the limit and have tended to concentrate more on GSecs than corporate debt.  There would also be announcements in course of time to revive the CDS market by allowing netting which will enable more liquidity in the market.

Hence while there have not exactly been any outlays here, these announcements can be seen more as reforms that are being brought in given the importance of all these three segments in the financial system.

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.

Economic Survey 2020 | Expert Talk: ‘This is a cautious and practical exposition by the government’: Financial Express February 1st 2020

Economic Survey 2020: There is definitely some optimism in the numbers which can be justified as coming over a low base in FY20. However, this also means that any unfavourable event can upset fiscal numbers. But this is a risk which all the finance ministers have to take.
 The Economic Survey is sanguine about growth in the next year at 6.5% though there will be fiscal challenges along the way. The Economic Survey is quite appropriately in two parts. While the first volume providing useful policy hints, the second provides factual information on the progress of the country’s economy.There are three interesting takeaways in the first volume.

The first is that a theoretical perspective has been provided on the recent controversy on the veracity of the gross domestic product (GDP) growth numbers.

It has been proved that the approach taken by the earlier research scholars was flawed.

This is comforting because it reinforces confidence in the numbers brought out by the Central Statistics Office (CSO).

Second, a prescription is made to have less of government in non-essential areas and here the suggestion is to have fewer controls and more disinvestment.

Area like agriculture, drugs and pharma, subsidies and loan waivers have been covered quite extensively to show that there should be more market forces and less government.

In the same vein, the Economic Survey is also emphatic about disinvestment being a serious business where the government’s stake goes below 51% and a framework of setting up a special body to transfer such stake is proposed.

Third, there is an interesting chapter on the use of a health card for non-banking financial companies (NBFCs) so that they can be monitored in a better manner, and more importantly, regulators can pick up early warning signals before a crisis really erupts. This is very pragmatic and we can see some action being taken immediately.

Simultaneously, it argues for quicker resolution processes under the Insolvency and Bankruptcy Code (IBC) framework. While it is admitted that the IBC has a been a positive story, banks need the comfort of faster resolution to enable them to lend more for long-term projects.

The Economic Survey is sanguine about growth in the next year at 6.5% though there will be fiscal challenges along the way.

The government should not be relying too much on non-tax revenue and hence, tax revenue is critical that is finally linked with growth in GDP. Similarly, with tax collections coming down in FY20, the government should be closely monitoring the numbers especially on the goods and services tax (GST) front as this reform was to be a major game-changer.

However, interestingly, the Economic Survey also talks about the need for having pro-cyclical fiscal policies meaning thereby that the government should be spending more even if it means crossing the Fiscal Responsibility and Budget Management (FRBM) line. Here, it should be noted that based on past Economic Surveys where the chief economic adviser (CEA) has expressed certain views, they are not automatically included in the Union Budget and hence, these suggestions should be read with this in mind. The CEA has a contrary view on inflation and argues here that temporary spikes in food prices should not be a limiting factor in monetary policy decision making.

A unique ‘thali-nomics’shows that price of basic food has actually come down. It needs to be seen if the Monetary Policy Committee (MPC) pays heed to this advice when it meets on February 4.

However, the growth projected for next year is probably the most critical part of the Budget because the real growth rate is normally added to inflation which would be probably 4% to arrive at nominal growth of 10.5%.
This would serve as the benchmark for all budgetary numbers as it will give an idea of how various tax collections would move besides having a bearing on the fiscal deficit, revenue deficit and debt ratios.

Hence, there is definitely some optimism in the numbers which can be justified as coming over a low base in FY20. However, this also means that any unfavourable event can upset fiscal numbers. But this is a risk which all the finance ministers have to take.

Has inequality come down? Here’s what data reveals Financial Express: 29th Jan 2020

The issue of equality has been debated for quite some time, and it is hard to get comprehensive data given the very large presence of the unorganised sector. One dataset that has a limited coverage, though nonetheless is very pertinent, is the one pertaining to income tax returns as it covers all tax assesses. This has limitation insofar as it looks at only income tax assesses and excludes a large part of the community such as agriculture or the gig workers who do not pay tax. But it is still indicative of income levels at the organised level of employment.

For FY19, there were 55.08 million tax assesses, which can amount to around 150-200 million of population depending on whether these tax assesses are single family income earners or dual income families. This number was 28.77 million in FY13, which is the earliest year for which data is available and hence grew at a CAGR of 11.4%. The total income of all assesses increased from Rs 12.14 lakh crore to Rs 34.14 lakh crore, implying a CAGR of 18.8% for the six-year period. GDP in nominal terms increased by around 11.5% during this period, which indicates that those paying taxes had a more robust growth in income over the national average during this period. The average income of tax assesses hence increased from Rs 4.2 lakh to Rs 6.2 lakh, which is a CAGR of 6.6% as against growth of per capita GDP of 10%. Therefore, income tax assesses had a lower growth in average income compared with the national average.

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To gauge the level of inequality in this sample of individuals, the following is examined. The income brackets are classified as under less than Rs 5 lakh, Rs 5-10 lakh, Rs 10-20 lakh, Rs 20-50 lakh, Rs 50-100 lakh, Rs 1-10 crore and above Rs 10 crore. The share of taxpayers in these groups are juxtaposed with the share in total income as per the returns that were filed. The two points chosen are 2012-13 and 2018-19. The matrix will then throw light on how different classes of people control the flow of income in the six-year period.

The accompanying table presents interesting results. The first is that the number of tax assesses who earn less than Rs 5 lakh has come down sharply during this period and, accordingly, the share in income has gone down. This implies that there has been a good movement up the ladder as a large population that was in this bracket has witnessed improvement in income levels and moved up. It is more likely that the new entrants into the organised workforce are in this bracket. Further, several organisations have increased their base salary, which has put employees in higher income categories.

Second, the above explanation fits well when the bracket of Rs 5-10 lakh is looked at, where the share in total assesses has doubled from 13.8% to 26.7%. The share in income has been more modest by 2.7% points. This has been also the typical spending class in the economy where the younger population tends to be concentrated in the early years of the career.

Third, the next two categories of Rs 10-20 lakh and Rs 20-50 lakh accounted for 5.2% of assesses and 20.9% of income in 2012-13. BY2018-19, their share was 9.5% in the former and 26.1% in income. Here too, there is reason to believe that this is more of upward mobility where the existing workforce has witnessed relatively higher pay revisions and increments, and this has increased their income. This was also the most productive class with 5-10 years’ of experience.

Fourth, the next three categories, which are actually very high income groups with over Rs 50 lakh income, show a contrasting picture. These are the groups that are subject to the special income tax surcharge, which goes up further once the Rs 1 crore threshold is breached. For the Rs 50 lakh-Rs 1 crore bracket, the share in both the parameters has increased from 0.23% to 0.38% in number and 3.7% to 4.2% in total income, which is modest. But for those earning above Rs 1 crore, the overall share in the number of assesses has gone up from 0.123% to 0.18%, but the share in income has come down from 8.2% to 7.9%.

The shifts in the highest three brackets are indicative of the fact that in the last six years there has been a rather sticky movement in pay packets for the class earning higher incomes. This can be linked with the economic slowdown, where the corporate sector has not performed too well on the top line and has compensated for the same by controlling costs, which include compensation. Hence, while the number of people who earn above Rs 1 crore has increased from 936 to 2,764, their share in the overall income has come down marginally.

Putting these numbers together, the impression we have is that for this sample of tax assesses, there is no evidence of income equality increasing, and that both of the corollaries hold. First, the people in the lower income brackets have migrated to higher levels, and with more people joining the workforce have had an increased share in the total pie.

Second, those at the highest income levels have witnessed more entrants, but the share in total has reduced marginally. Part of the reason is the economic slowdown where the salary component of senior executives becomes sluggish in the upward direction while there could be compensations in the form of stock options.

However, this analysis does not hold for wealth, as income is not reflective of wealth on which comparable data is not available. The income earned here is based on the returns filed by individuals on which there would be exemptions and hence make the taxable income of a lower order. This is also not a complete picture of inequality as it does not include the poorer people, which include farmers, daily wage earners, domestic help, self-employed with no taxable income and, more importantly, the unemployed.

But it does indicate that once people join the organised sector (defined as those that involve paying income tax), a sense of equality has built up, with there being more competitive opportunity for individuals. Also, the fact that high income earners are financially more onerous to companies has meant that there has been a preference to hire at the mid-level and provide more attractive compensations. Those at the high level will have problems in leaving their jobs even if their pay packages do not increase, as the amount earned is relatively on the upper scale. These may be considered to be the factors that have led to this phenomenon of narrowing the distance between the lower and the higher income groups.

Budget 2020: Actual policy announcement to take a back seat...Financial Express 21 January 2020

Union Budget 2020 India: The next big policy announcement will be the Union Budget, which, as usual, has raised expectations. While a lot of announcements pertaining to different sectors have been made by the government since August, the issues on taxation have not been completely addressed, and, hence, the market expects these to be addressed on February 1. But, since changes to GST are solely within the ambit of the GST Council, it is only income tax that can be addressed. Similarly, a number of announcements have been made with respect to tax refunds and operational issues, especially for SMEs, as well as bank mergers, which obviates the need for a fresh set of measures addressing these concerns.

Two things would be important—the revised numbers of FY20, and the fiscal contours of FY21. The revised numbers are important because there has been substantial debate on the achievement of fiscal targets for FY20. More so, because when the corporate tax rate was lowered, it was officially stated that the revenue loss from this could be Rs 1.45 lakh crore. Besides, the Budget was drawn up with two rather aggressive assumptions. The first is the 7% GDP growth rate during the year; this will now be 5%, as per the CSO. The other is that the overall size of the budget, which comprises revenue collections and borrowings, was Rs 27.9 lakh crore over a revised number of Rs 24.6 lakh crore; this was surprising given that the actual number, as per accounts for March 2019, was Rs 23.11 lakh crore. The important implication, here, is that, as per the budget, the government was to raise an additional Rs 3.3 lakh crore over FY19; this would, then, amount to Rs4.8 lakh crore, based on the Therefore, the fiscal numbers for FY20 assume significance as they will also reveal the willingness to compromise on the fiscal deficit target to prop up the economy by enhancing the fiscal deficit. Hence, the questions here are: Will tax revenue collections be met? Will disinvestment of `1 lakh crore materialise even though some announcements have been made? At present, the market does not expect more than two-thirds of the target to be achieved. Missing the disinvestment target will have implications for the FY21 target, too.

On the expenditure side, the accounts show that ministries have been spending within the budgets mandated by the FM, so far. Now, with slippages on the revenue side, the obvious question to be asked is whether or not expenditures will be managed by some tweaking, especially in February and March, after the budget is presented. There are two options available to the government, here. The first is rollover of some expenses, in particular, subsidies. Last year, there was a large rollover, where the FCI had to borrow from banks to procure foodgrains from farmers. The other is cutbacks on capex by ministries towards the end of the year. These are standard ways of controlling the level of fiscal deficit, which appears almost certain to go towards 3.8-4% this year, even with these cuts. In fact, some social programmes can also be pruned. Which option is availed will be known only when the accounts are presented.

The more important announcements that will be observed are those pertaining to FY21. Income tax rates are something that households are expecting to come down. Now, at a time when GDP growth has slowed down and will probably not move beyond the 6-6.5% range for FY21, it may be hard for the FM to go in for such cuts. But, with consumption being down, there is demand for these rates to be rationalised. This will be an interesting call because the DTC spoke of lower rates, but annulment of tax deductions, which if done, may not leave households better off in net terms. At the same time, doing it upfront risks collections coming down. Therefore, this will be a tough call for the government to take, considering that there is reason to believe that the GST rates may be tweaked upwards during the course of the year as the continuous downward movement of rates has impacted collections.

Second, the fiscal target would be very important not just from the point of view of the market borrowings likely for the year, which in turn will have a bearing on RBI policy, but also because it will reveal the fiscal path chosen by the government. If the target is lower than that for FY20 (R), it would mean that the prudent path is being pursued; anything in the range of 4% or above will mean that the government will be taking on the role of a fiscal stimulus given that the monetary push has not quite worked the way it was intended to.

Third, the expenditure pattern will be of interest on two grounds that will partly be revealed in the fiscal deficit numbers. The first is the allocation for capex—Rs 3.4 lakh crore for FY20. As the government has spoken of a target of Rs 102.5 lakh crore for infra spending, of which the central government is to contribute 39%, this number should ideally be increasing. The other pertains to the social expenditure as there will be no further compulsions of elections for some time. The Rs 75,000 crore PM-Kisan scheme was a big-ticket expense announced last year, and while it would be interesting to see if the entire amount for the year gone by has been, or will be spent, the target for the next year will be important, too, as it will have a bearing on the fiscal trajectory.