The credibility of the fiscal consolidation glide path has been dented which is also reflected in the Sensex falling by over 1,000 points after the Budget announcements
The Union Budget for 2020-21 presented to the Parliament by Finance Minister (FM) Nirmala Sitharaman on February 1 confirms apprehensions that the actual fiscal deficit (FD) for 2019-20 would exceed the Budget Estimate (BE) by a significant margin. Sitharaman puts it at 3.8 per cent of the GDP against the target of 3.3 per cent. However, she has justified this deviation in terms of the recommendation of the NK Singh Committee on review of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 which permits breach of the target in case of “far-reaching structural reforms with unanticipated fiscal implications.”
For 2020-21, the FM has provided for a FD of 3.5 per cent as against 3.0 per cent as stipulated under the FRBM Act. Here also, she has justified the deviation of five per cent in terms of the “unanticipated fiscal implications”. One wonders whether this could be a credible justification considering that there is no major announcement in the Budget which could qualify in the category of structural reforms.
However, she has candidly acknowledged the existence of so-called off-budget liabilities and extra-budgetary resources (EBRs) — a euphemism for borrowings by agencies and PSUs made on behalf of the Government — and mentioned these in an annexure. She has also stated that it is the responsibility of the Government to service these liabilities. Having done so, logically these should have been brought on to the balance sheet and accordingly, revised the FD upward. In essence, the projected health of the Budget continues to be misleading.
The credibility of the fiscal consolidation glide path has been dented, which is also reflected in the Sensex declining by over 1,000 points or 2.5 per cent. Going through an unusually lengthy speech, one fails to come across any major reform measure that would either have the effect of bringing about drastic reduction in any of the major subsidies viz. food, fertilisers, fuel, electricity and so on or indicative of any major dilution in Government intervention or boost to market forces (as alluded to in the Economic Survey: 2019-20).
Even as the Budget is replete with welfare schemes being implemented under the Direct Benefit Transfer (DBT) mode to prevent pilferage, there is no mention of implementing DBT in the above-mentioned areas wherein subsidies guzzle over Rs 300,000 crore every year. The recommendation of the Chief Economic Advisor (CEA) for attempting some reduction in food subsidy by limiting coverage (over 800 million people are covered under the National Food Security Act (NFSA)) and increase in the issue price — currently Rs 1/2/3 per kg for coarse cereals, wheat and rice — remains unheeded.
In electricity, the proposal for smart meters, pre-paid meters and giving choice to consumers to choose their suppliers as a way forward to address the issues facing power distribution companies (PDCs) does nothing to deal with fundamental ailments afflicting the sector. These arise due to supply of electricity to a certain category of consumers viz. poor households and farmers either at a fraction of the cost of purchase and distribution or even free; large-scale theft (very often abetted by political brass) and inflated tariff allowed to generators under power purchase agreements (PPAs). One wonders whether these would be addressed under New Tariff Policy (NTP).
In this backdrop, the proposal to allow a lower corporate tax rate of 15 per cent to existing power generation companies on par with that applicable to new enterprises (this was announced under the package of steep reduction in the corporate tax last year) will be of no consequence. A concession in tax rate helps only when the generator makes profit. But in a situation wherein it does not even get paid for its supplies (courtesy, mess in discoms), this won’t be of any use.
Meanwhile, the FM has revealed the Government’s decision to accept the interim recommendations of the 15th Finance Commission (FC) for 2020-21. This may not be good news for the States already facing stress on their balance sheets (due to shortfall in their own revenue and pending dues from the Centre under the GST) as the FC has recommended a significant cut in devolution of Central taxes even while proposing greater help through grant-in-aid. The Budget talks about giving a big boost to the agriculture and rural sector and reiterates the Government’s overarching commitment to doubling farmers’ income by 2022.
A number of innovative steps are suggested under a 16-point agenda — comprehensively covering almost every area that has an impact on farmers’ ability to increase income. These cover inter alia adoption of flexible laws in sync with the model legislations passed by the Centre, creation of warehousing and cold storage facilities in the supply chain (including at the village level), setting up of solar power units on barren land, plan for use of proper manure (reducing dependence on chemical fertilisers) and minimising use of water, strengthening and expanding scope of Farmers Producers Organisations (FPOs) to include fisheries, increase in credit availability, increase in piped water supply to all households and so on. Agriculture being a Concurrent subject under the Constitution, all of the above is sought to be achieved by giving incentives to the States plus involvement of agencies like the Central Warehousing Corporation (CWC), Food Corporation of India (FCI), viability gap funding plus financial support from organisations like NABARD (National Bank for Agriculture and Rural Development) and so on.
When viewed in the backdrop of States continuing with archaic laws such as Agriculture Produce Market Committee (APMC) under which millions of farmers and even FPOs are held hostage to politically-backed intermediaries/traders at the mandis, these would remain as pious declarations as always in the past. Even so, the allocation for agriculture and allied sectors and rural development at Rs 283,000 crore for 2020-21 is just about Rs 23,000 crore higher than the allocation for 2019-20 which is “modest” for the intended gigantic transformation. Curiously, the provision includes Rs 60,000 crore for PM - KISAN which is essentially consumption oriented; it can’t be deemed as augmenting the income-raising ability of farmers.
The lack of demand and investment are identified as two major constraints to growth. Continuing with a spate of stimulants provided during August/September 2019, this Budget has attempted to leave extra money in the pockets of salary earners by creating a highly differentiated slab structure. Under the new scheme of things, the highest tax rate of 30 per cent kicks in at an income of Rs 15 lakh against the current threshold of Rs 10 lakh. So, a person earning Rs 15 lakh will save about Rs 75,000 (as per the FM’s calculation).
For the corporates, the dividend distribution tax (DDT) has been abolished, sparing them the double whammy of taxing profit first at the distribution stage and then in the recipient’s hand. The Budget contains a spate of concessions for MSMEs, start-ups, exporters and the real estate sector, given their importance from the perspective of employment generation. A number of innovative steps are envisaged for MSMEs to help with the timely payment of their dues from large enterprises and increase in financing (especially through “invoice financing” by NBFCs).
The Budget reiterates the Government’s commitment to continue with consolidation of public sector banks (PSBs), giving tax incentives under their mergers and amalgamations, effective use of the Insolvency and Bankruptcy Code (IBC) for recovery of NPAs, recapitalisation for adequate provisioning and credit growth, improvement in the quality of lending and so on.
There will also be greater focus on continuous monitoring of loans and creation of a data bank to detect early signs of delinquency. The building of infrastructure commensurate with making India a $5 trillion economy has received much attention. A comprehensive roadmap for projects to be taken up under the National Infrastructure Project (NIP) scheme is laid out. This is welcome but there remains a big question mark over funding it which entails a mammoth investment of Rs 100 lakh crore over the next five years.
The Budget seeks to give a boost to “Make in India” with emphasis on consolidating its lead in the digital revolution and propping up industries involving labour- intensive technologies. However, from the way the FM has made changes in customs duties, it would appear that the Modi Government could be in for “over-protectionism.” This won’t be in the long-term interest of India wanting to derive a good slice of its growth potential from increasing participation in global trade.
The FM has attempted a detailed blueprint of what all needs to be done to pursue the three themes viz. “Aspirational India”, “Economic Development”, “Caring Society.” But, in the absence of credible plans for arranging resources (without destabilising the fiscal applecart) and garnering necessary political will for execution, it is doubtful whether the results will match the intent.
(The writer is a New Delhi-based policy analyst)
