FPJ Edit: Unrealistic budget numbers

If the share markets reacted to the Budget the way they did last Saturday, falling nearly a thousand points, they clearly found precious little in it which would motivate them to persist with the near one-way trajectory of the Sensex in recent months despite plethora of adverse economic and political developments. To the extent the bull-run was paused, if not entirely reversed in the opposite direction, the Budget shock may not have been a bad thing.

Markets too need to come to grips with the objective reality instead of firing on blank and constantly driving the indices in the stratosphere. That heady march of the Sensex, hopefully, will be tempered by the actual state of the economy. Even though it is widely suggested by the ruling party mandarins that the economy has bottomed out and it has now nowhere to go but up, the proverbial green shoots of growth are still not visible.

Nirmala Sitharaman’s numbers last Saturday confirmed the grim reality of unmet revenue targets in 2019-20. Her projections proved way off the target, constraining spending in key sectors of the economy. Instead of the hoped-for boost in GST collections, these have remained stagnant around Rs 1 lakh crore monthly.

A shortfall of Rs 3 lakh crores in the budgeted target for 2019-20 probably does not tell the full story about the bleak economic scenario. Though it was claimed that the economy had long emerged from the ill effects of demonetisation and the GST, quite clearly the damage was so severe in some sectors that it has impaired growth. Particularly affected by the pincer onslaught of demonetisation and GST was the labour-intensive micro, small and medium enterprise sector which collectively contributed to growth, though a lot of it as part of the informal economy. 

Incidentally, it would be for the authorities to examine whether the credit extended to the MSME sector under the Prime Minister’s special scheme on easy terms is now turning into a headache for the lenders with the central bank already raising a red flag due to high percentage of defaulters. Over Rs 11 lakh crores cumulatively was said to have been disbursed to the sector, mostly to small and medium entrepreneurs and this may be the next cause of bad debt problem of the banking system. 

However, a quick economic revival can stave off the crisis, offering meaningful employment to tens of thousands of self-employed entrepreneurs in the informal sector which, in turn, will have a spin-off effect in large segments of the services and manufacturing sectors.

Even though the Finance Minister has been complimented for scaling down her ambition for revenue growth in 2020-21 to 12 per cent, most observers would find even this target rather too ambitious. Unless the economy regains momentum, growing at about seven percent, the projected targets may remain unmet.

Why, after giving away Rs 1.5 lakh crore in off-budget corporate tax a few months ago, it is unrealistic to expect much higher collection in the current climate of economic slowdown. Again, after income tax concession of Rs 40,000 crores to the middle-class salariat and the self-employed, a big boost in direct tax collections is highly unlikely.

No less unrealistic is the target of a 17 per cent increase in GST collections. How it will be done without raising rates is unclear, though in a depressed economic scenario an increase in rates can only worsen the situation. Even the questionable hikes in import duties on some items will have only a negligible impact on revenues. And if the Centre moves to extract the old dues of Rs 1.3 lakh crores from the telecom firms, including interest and penalties, there is a genuine fear that it may end up killing the goose that lays the golden egg with some telecom firms declaring bankruptcy and making lakhs of people jobless.

In short, if there is light at the end of the economic tunnel it only comes not from Sitharaman’s budget but from the cyclical nature of economic growth, expanding and contracting by turns. Yes, the slowdown may have bottomed out, the banking sector may have largely recovered from the loot-and-scoot of the UPA era, and the rural economy after three years of slowdown might be experiencing an uptick in prices of agri-produce, and, the crude price globally might still be benign. All these give reason for hope that the worst may be behind us. Yet, we should keep our fingers firmly crossed.

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