Against the backdrop of a serious slowdown in the economy, the first budget of the new decade was expected to fire the imagination of various stakeholders to get the economy back on track.
With the stock market giving a big thumbs-down by recording a drop of nearly 2.5 per cent in Nifty50, at least the FM’s Budget speech has failed to do that. Among the fraternity of economists and policymakers, it was widely expected that the Budget would involve a policy push to private consumption and private investment, both of which depend on economic fundamentals and consumer/ business sentiments in the economy. The last few years have seen political brinkmanship, a proactive tax administration and an absence of cohesive vision for economic reforms, all contributing to uncertainty and weakness in sentiments. Thankfully, there is something in the Budget proposals that addresses some of these concerns.
The macroeconomic message from the Budget is on the whole cautious, more could have been done. With advance estimate of GDP growth for fiscal-2020 at 5%, the downward revision of GDP growth for both fiscal 2019 and fiscal 2018 and a nominal GDP growth projection of 10% for fiscal 2021, the government is admitting the seriousness of the economic slowdown and also the fact that it does not anticipate a quick recovery in the growth momentum.
A nominal growth of 10% translates into a real GDP growth of at best 5.5% to 6%, which has implications for projections of tax revenues and consequently on fiscal deficit numbers. The gross tax-GDP ratio is projected to improve only marginally to 10.8% on account of stagnating indirect tax-GDP ratio at 4.9% in 2018-21. This does not speak well of the government’s resolve to address the GST concerns and improve indirect tax buoyancy. The revised estimate of fiscal deficit at 3.8% for fiscal 2020 and budgeted estimate of 3.5% for fiscal 2021 are both 0.5% deviation from the FRBM targets. These figures do not include the money that Centre owes to states on account of GST compensation for last two fiscals and below line budget items (including the money owed to FCI). The government could have released some of this money in the current fiscal and some in the early part of fiscal 2021 for a faster turnaround in GDP growth. The personal income tax concession of Rs 40,000 crore may afford some improvement in consumption spending, as will the turnaround in agricultural terms of trade observed in the current agricultural year. Importantly, the Budget includes several measures such as the model legal frameworks for tenancy and agriculture produce marketing to state governments, to potentially improve farm incomes. But, much of the follow-up action lies in the state government domain and would depend on how well the Centre can incentivise it.
The main challenge has been to revive private investment for which growth in domestic consumption spending is a precondition. Fresh investments in capacity augmentation will flow once existing capacities are utilised. Accelerating national infrastructure pipeline projects and measures to attract foreign sovereign wealth funds through tax concessions and structural reforms in infrastructure are steps in the right direction. With the clean-up in the financial sector to improve credit flow and the corporate tax cut announced earlier and removal of the divided distribution tax may help improve margins for the private sector to fund investments. However, the proof of the pudding is in eating.
(Courtesy of Mail Today)