The Union Budget for 2020-21 presented to the Parliament by the Finance Minister, Nirmala Sitharaman on February 1, 2020, confirms apprehension 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% of GDP [gross domestic product] against the target of 3.3%. 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 finance minister has provided for FD of 3.5% as against 3.0% as stipulated under the FRBM Act. Here also, she has justified the deviation of 5% 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 public sector undertakings [PSUs] made on behalf of the sovereign 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 balance sheet and accordingly, revised the FD upward. In essence, the projected health of the budget continues to be misleading.
The credibility of fiscal consolidation glide path has received a major dent which is also reflected in the SENSEX declining by over 1000 points or 2.5%. 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, fertilizers, fuel, electricity etc or indicative of any major dilution in government intervention or boost to market forces [as alluded to the Economic Survey – 2019-20].
Even as the budget is replete with welfare schemes being implemented under direct benefit transfer [DBT] mode to prevent pilferage, there is no mention of implementing DBT in the above mentioned most crucial 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 persons are covered under 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% 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 informed about 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 GST] as the FC has recommended 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 government 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 fertilizers] and minimizing use of water, strengthening and expanding scope of farmers producers organizations [FPOs] to include fisheries, increase in credit availability, increase in piped water supply to all households etc.
The 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 Central Warehousing Corporation [CWC], Food Corporation of India [FCI], viability gap funding plus financial support from organizations like NABARD [National Bank for Agriculture and Rural Development] etc.
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 kept 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 & 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 75,000 crore for PM – KISAN which is essentially consumption oriented; it can’t be deemed as augmenting the income raising ability of the farmer.
Lack of demand and investment are identified as two major constraints to growth. Continuing with a spate 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 30% 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 FM calculation].
For the corporate, the dividend distribution tax [DDT] has been abolished sparing them the double whammy of taxing profit first at distribution stage and then in recipient’s hand. The budget contains a spate concessions for micro, small and medium enterprises [MSMEs], start-ups, exporters and real estate sector given their importance from the perspective of employment generation. A number of innovative steps are envisaged for MSMEs to help timely payment of their dues from large enterprises and increase in financing [especially through ‘invoice financing’ by NBFCs].
The budget reiterates 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 [non-performing assets], recapitalization 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 data bank to detect early signs of delinquency.
The building of infrastructure commensurate with making India a US$ 5 trillion economy has received much attention. A comprehensive road-map 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 labor intensive technologies. However, from the way FM has made changes in customs duties, it would appear, 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 blue print of what all needs to be done to meet the pursue the three themes viz. ‘Aspirational India’, ‘Economic Development’, ‘Caring Society’. But, in the absence of credible plans for arranging resources [without destabilizing the fiscal apple-cart] and garnering necessary political will for execution, it is doubtful whether the results will match the intent.