Honourable FM Mrs Sitharaman will present her second budget on the 1st of February at 11 am. Given that this budget is being presented over the concerns of slowing economy and rising unemployment, falling credits, and actuating inflation, the FM will have to fight it out on many fronts.
Failures of 2019-20
Economic growth in the most recent quarter for which data is available has been just 4.5 percent while for the whole year expected to be around 5 percent. Our labour participation rate is at an all-time low of 42.4 percent as of November 2019 and credit growth from banks has more than halved in 2019 compared to a year earlier while the rise in retail price inflation neared a six-year high of 7.35 percent in December. Last year FM had set a fiscal deficit target of 3.3 percent for the current financial year and in order to finance this expected level deficit, a nominal GDP growth of around 12 percent annually was assumed. The nominal GDP is a measure of the overall level of spending in the economy and for the current year it is expected to hit a 42-year low of 7.5 percent. The worst past is high government spending essentially supported the current sluggish GDP growth rather than the consumer spending.
Revenue shortfall In order to activate the spending speedometer, last September saw slashing of corporate tax rate from 30 percent to 22 percent for local companies. Corporate India and investors lauded the move with the Sensex recording a 5 percent rise that day. The cut however appears not to have delivered the desired on the contrary it has given a big blow of Rs. 1.45 lakh crore to the government’s tax collections annually, widening the deficit.
The Central GST tax collections have fallen short of the budgeted estimate by almost 40 per cent between April and November. Corporate tax collections have also taken a hit after the tax cuts announced in September. Direct tax collections stood at Rs 5.5 trillion by the end of November, which are a long way off from meeting the budgeted target of Rs 13.35 trillion.
New objectives for 2020
The objective of Budget 2020 must be to revive domestic demand, create jobs and revive the credit cycle in the economy. There is a greater need for a well coordinated policies for agricultural sector, introduce sentiment-boosting measures to reinstate confidence within NBFCs.
The simplest (and quickest) way to stimulate demand is by putting more money in the hands of people, irrespective of the consequence of fiscal deficit target slippage. This can be done by cutting the personal taxes and by increasing the benefit through cash transfers. Increasing the allocation for support prices, incentives, rural wages, allocation for MNREGA and subsidies through direct transfers will allow consumers to touch their pockets to spend.
The FM is expected to tinker with the tax slabs rather than cutting taxes. There is a strong feeling that there will be no tax on incomes until 5 lakhs, at 10 percent on incomes from 5 lakh till 10 lakhs 20 percent on income from 10 lakh to 20 lakh and 30 percent thereafter. FM should remove the dividend distribution tax (DDT) and Tax on Long term Capital Gains must be to improve investor sentiments.
The credit flow has to increase drastically in the economy. Even though RBI has lowered its benchmark repo rates by around 150 basis points in 2019 the lending rate for fresh loans has fallen by less than 50 percent. There is a need for a fiscal stimulus for the real estate, finance, NBFC, and the auto sectors. Quick reviews of the capital position of NBFCs by the Reserve Bank of India (RBI) could be one important measure that needs to be taken. To ease liquidity in the sector, there needs to be a more direct approach to resolve the crisis.
Builders in the Real Estate and Construction sector are abandoning incomplete projects. The work-in-progress inventory of piling in the real estate sector for no new buyers is getting in. Releasing the real estate bailout fund that could revive stuck projects is thus the need of the hour. The finance ministry has announced Rs. 25,000 crore fund for this along with the State Bank of India and the Life Insurance Corp), but it needs to be ensured that developers of stalled projects actually avail these funds. Further the PSU bank funds must be channelized towards the housing loan industry as leaving aside the SBI, all PSU banks have been missing from the segment.
The National Housing Bank (NHB) should be allowed to expand its finance development role to support HFCs.
The hope is that there is an increase in the deduction of interest of housing loan for self-occupied property from Rs. 2 lakh under Section 24 of Income tax act to Rs 3 lakh. A hike in this limit also for non-occupied property, lowering stamp duty, incentivising rental housing and lowering home loan interest rates will help this sector to spur demand. A clear-cut guideline in the direction of land reform is much needed to bring down the project cost and make housing truly affordable across sections.
To boost the auto sector, GST reduction (on vehicles) from the existing 28 to 18 percent to boost consumption on the back of slackening demand and price hikes led by BSVI implementation from April 2020
Areas of caution
The incoming budget must therefore set a more realistic disinvestment targets for itself in this Budget so that the fiscal math is not affected towards the end. The Modi government has been setting high disinvestment targets exceeding Rs 50,000 crore each year and has also achieved them in the last two fiscal years. For FY20, the government had set a target of Rs 90,000 crore last February, which was revised upwards to Rs 1.05 lakh crore after it was re-elected, the highest in India’s history. It is now certain that we have grossly missed the target having clocked just Rs. 17,364 crore since April 2019. With around 85 percent of our target unrealised, the fiscal deficit will even widen further. Moreover, the government should also look for productive means to enhance revenue instead of merely depending on disinvestment.
The government has announced several measures, including the ambitious Rs 102 lakh crore investment plans for next five years for the infrastructure sector. To reach the Rs 102 lakh crore investment target in, say, five years, the total investments need to be around Rs 20 lakh crore a year. Given that India has been spending an average Rs 8 lakh crore annually with States contributing more amounts than the Centre, it is not understood from where the money will come? Several state governments are desperately falling short of GST revenue collections and have not been able to recover the promised compensation due to revenue loss on account of the GST implementation from the Centre means that States will not be able to contribute more as in the past.
The Hon FM has limited choices and resources at her hand for the upcoming budget exercise. Given the tight conditions we cannot expect any creativity or unexpected announcements. Given the credibility of the FM to defy facts and logic the curiosity quotient is high. Let’s wait to see how the expectations of the economy are realised.