The most awaited policy of the government is the Union Budget. There are lots of hopes that there would be something for everyone as the government seeks to provide a boost to the economy. The promises made in the Elections Manifesto do inspire such hopes which may be hard to satisfy in this Budget. Both consumption and investment are just about stable and there is need for the government to provide a push. But just how much can the government do?
The question is pertinent because the government is constrained by the principles of FRBM wherein the fiscal deficit has to be kept under control. Therefore the number of 3.4% which was projected in the Interim Budget cannot really be changed much. While some economists have asked for a booster through a fiscal stimulus, it looks unlikely that the government will go for it and increase the deficit to 4% with the additional spending being on infrastructure. There is hence limited scope at the practical end.
For consumption, the government has already implemented the kisan cash scheme that involves cash transfers to farmers which would be Rs 87,000 cr for the entire year. This is a good amount to provide some impetus from the rural economy which was missing last year when the prices of crops came down leading to erosion in their income and spending power. Some concessions have been given to the lower income groups for incomes below Rs 5 lakhs in the Interim Budget. But to stimulate consumption, tax cuts at the higher levels which involve increasing the size of tax slabs would work. People with higher incomes typically have the spending power and if a boost has to come for auto and consumer durable goods, such a move will help. But this has to be balanced with the possible revenue loss. Also such a move has to be done in conjunction with the GST Council where tax rates need to be rationalised. A decision on this will be eagerly awaited.
On the investment side, India Inc will be eagerly waiting to see if there are any concessions given on investment as well as corporate tax rate. Benefits through a specific investment allowance can work to directly inspire capital allocation while a lower corporate tax rate will provide a boost to their earnings. The government had earlier spoken of a road map for cutting the corporate tax rate by 5% and lowered the rate for the smaller companies. The larger companies which are more active in investment would be looking for such incentives. Therefore, it will be interesting to see if the FM does bend on the taxes given the limited scope that is there in other areas.
Two interesting sources of finance this year will be the RBI and disinvestment. There has been enough debate on whether or not RBI reserves need to be transferred to the government and a committee headed by Dr Bimal Jalan is looking at the possibilities. If reserves of the RBI, which could range from Rs 1-2 lkh crores, can be diverted to finance the budget over a period of say 2-3 years, there would be a useful source of finance. The government would be eagerly awaiting the decision of the committee as the PSBs too are in need of capital. While issuance of recapitalisation bonds is an option, if it has to be funded through the budget it would be necessary to look for alternative sources of funding given that there are limits for the same to be done through the regular channels. It must be noted that the Interim Budget was silent on this score.
The other major source of finance would be disinvestment which has been projected at Rs 85,000 cr but could be stretched to a higher level if needed. It is now accepted that disinvestment is a way of using the reserves and surpluses of PSUs to finance the Budget and therefore can be entrusted with garnering more funds.
It is unlikely that the government will have space to announce new expenditures and it will be confined more to the existing headings that were announced in the Interim Budget. The final numbers for FY19 have fallen short of what was projected in the revised estimates for the year which means that the present focus has to be more on garnering more funds to finance the existing expenditure rather than incurring fresh programmes.
With virtually 3 months of the year going by, the Budget will have to walk the tightrope of managing the fiscal balances as it would not be appropriate to expand on the borrowing programme given the tenuous nature of liquidity in the system. It has to be the case of managing the best within the constraints. The GST earnings are still an uncertainty and have been quite volatile last year and it may take another year to really settle down to a steady state flow of revenue. The uncertainty in monsoons so far could be a sore point along the way which also means that for the present no economies on social expenditure can be expected.
Therefore, we may not expect any major changes in the structure this time. But it would be useful if the FM not just announces a roadmap for the next four years but also timelines as the expectations that are raised need to be realised. This looks more probable under the given circumstances.
-Madan Sabnavis
The writer is chief economist, CARE Ratings. The views are personal.
