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If the present is not beautiful, the future will be – is how Nirmala Sitharaman has prefaced her maiden Budget. She has talked of doubling farmers’ income by 2022 – something PM Modi often advocated in the past. She spoke of taking electricity to every house in the country. Above all, she pledged to make India a five trillion dollar economy by 2025.

India is slated to become a three trillion dollar economy in the current year and by that trend it is possible to make India a five trillion dollar economy by 2025. But for that, the FM has to take measures to bring the economy back to high growth trajectory. India has to grow 8% annually to achieve the target. But India’s GDP growth slumped to a five-year low of 6.8% in 2018-19 and is estimated to grow by about 7% this year.

The question is: Has she taken enough measures in her Budget to stimulate growth? 

What one gathers from her Budget speech is that she has largely followed the path of her predecessors. She said, “At the centre of everything that we do, we keep gaon, garib, aur kisan (village, poor and farmers).” A ministry-wise analysis does suggest that agriculture and new and renewable energy are the top two gainers, with their budget allocations in fiscal 2020 significantly higher than in the past five years. The allocation to the Ministry of Agriculture, for example, was 223% higher in 2019-20 compared to the yearly average allocation during 2014-2019. The allocation for the Ministry of New and Renewable Energy has gone up by 97% in

2019-20 compared to the yearly average allocation during 2014-2019.

The sharp rise in allocation for agriculture is, however, partly because of the Pradhan Mantri Kisan Samman Nidhi scheme worth Rs. 75,000 crore, announced in the Interim Budget itself. The rise in allocation over the previous five-year average is also on account of the interest subsidy for short term credit to farmers, which was included under the Department of Financial Services earlier but has been, included under the agriculture head since fiscal 2017.

Higher allocations to agriculture suggests the FM’s declared objective to improve the farm economy but what is disturbing is that the allocations to ministries of heavy industries, planning and civil aviation, which are big allies to growth, have declined sharply in 2019-20.

Fiscal deficit target lowered

Coming to budget equation, Sitharaman has projected the fiscal deficit for 2019-20 at 3.3% from 3.4% announced in the Interim Budget last February. This despite the fact that estimates of revenue receipts for the current year have been revised downward at Rs. 19.63 lakh crore against Rs. 19.78 lakh crore estimated in the Interim Budget.

To meet the revenue goal, the disinvestment target has been increased to Rs. 1.05 lakh crore from Rs. 90,000 crore estimated in the Interim Budget. The FM has said that strategic disinvestment of Air India will be reinitiated. However, disinvestment of Air India has so far failed to attract investors and one has to wait and see how the government will meet its disinvestment target.

The growth in direct taxes that has been higher than estimates could also provide a cushion. However, GST revenues have not been meeting targets. It fell below Rs. 1 lakh crore for the month of June, 2019.

The FM has estimated fiscal deficit figure at 3.3% by assuming a 12% growth in nominal GDP for FY20 against 11.5% assumed in the Interim Budget last February. Given the sharp slowdown in GDP growth in recent quarters and the underlying trend in exports, such growth appears a difficult task to achieve.

Taking advantage of the subdued oil prices, the government has raised the excise duty and road cess by Rs. 1 per litre to garner another Rs. 20,000 crore to lower the fiscal deficit figure.

Whether the government will meet its fiscal deficit target will be known next year, but the fact remains that adhering to the ‘Fiscal Responsibility and Budget Management Act’, New Delhi has steadily reduced fiscal deficit over the years – down from 4.5% of GDP in 2013-14 to 3.3% in 2019-20 Budget. 

Infrastructure growth remains a priority

If Sitharaman has not taken direct measures to push GDP growth, her Budget has maintained the focus on infrastructure development, the basic parameter of growth. The vision ‘One Nation One Grid’ for electricity and a similar plan for gas grids, water grids, i-ways and regional airports is expected to have significant impact on the economy.

FM has announced a number of steps to scale up the country’s infrastructure, including supplementing and expanding 1,25,000 km of rural roads under the Pradhan Mantri Gram Sadak Yojana (PMGSY) at a cost of Rs. 80,250 crore and creating a national highways grid.

The Budget also proposes investment of Rs. 50 lakh crore in expanding railways infrastructure by 2030 as well as substantial investments for roadways upgradation and connectivity. The government’s emphasis on investing Rs. 20 lakh crore every year in infrastructure development will help the growth of key infrastructure industries including steel and cement.

Tata Steel CEO and MD T V Narendran said in an interview to a national newspaper that the domestic steel market has seen some decline in demand, and the measures announced in the Budget are a welcome development. He stated, “We believe investment in the infrastructure sector and moves to attract private capital in railways and waterways can have a positive cascading effect in the economic activity across sectors of development and growth.”

The Economic Survey for 2018-19 estimated the country’s steel output at 128.6 million tonnes by 2021 and consumption to reach 140 MT by 2023 on the back of investments in infrastructure, construction and automobile sectors.

Connecting rural India, both physically and digitally, is another positive step for the economy. Announcement of streamlining multiple labour laws into a set of ‘four labour codes’ too is a progressive step.

As for the real estate sector – which is undergoing a bad phase with a huge amount of unsold residential and commercial spaces – the push for affordable housing and infrastructure, along with the promotion of rental housing has given some solace.  FM has raised the tax deduction limit to Rs. 3.5 lakh on the interest paid on home loans sanctioned during this financial year for the purchase of the first home worth up to Rs. 45 lakh. The real estate sector has welcomed the move but seemed to be miffed that the Budget failed to address long-standing expectations regarding industry status for the sector, single-window clearance and reforms in the Goods and Services Tax (GST).

MSME – the catalyst of growth

Micro, Small and Medium Enterprises (MSMEs) play a significant role in India’s economic growth owing to their contribution to production, exports and employment. The sector contributes 8% to the country’s GDP, 45% to the manufactured output and 40% to the country’s exports (Vision 2020: Implications for MSMEs – FICCI).

 MSMEs in India are inherently suffering from financial stress and the credit boost to MSMEs through Rs. 350-crore interest subvention and 2% interest subvention for GST-registered MSME on fresh or incremental loans suggested in the Budget are expected to help businesses and boost the waning economy of this sector. Also, introduction of Rs. 1 crore loan for MSMEs would be a great relief to small businesses, making easier accessibility and processing of loans through a single portal.

The increase in turnover limit to Rs. 400 crore for companies to avail themselves of the 25% tax slab would lead to more capital in the hands of businesses to invest in growth. The raising of turnover slab to Rs. 400 crore will benefit most of the companies. FM said, “This will cover 99.3% of the companies. Now only 0.7% of companies will remain outside this rate.” 

Savings-investment equation

When one talks of growth the first thing that comes to mind is investment. Higher growth requires higher savings and investment. And India has not witnessed a favourable trend in either of them in recent years. Gross fixed capital formation, which is net investment in fixed assets as a share of the gross domestic product, was 32.3% in 2018-19, compared with 38.7% in 2012-13 – a fall of 6.4 percentage points in six years.

To change this trend and to revive the investment climate banks have to lend more. The rising non-performing assets of banks in the past had made them shaky and ever so cautious to lend. Good news is that the situation is changing and advances of banks are rising. The total outstanding non-food loans by scheduled commercial banks rose by 12.3% between March 2018 and March 2019, the first year of double-digit growth in the past five years. Enabling private investment would also require a more streamlined land acquisition process and faster environmental and other clearances, which clearly show the new government has its task cut out. 

Second, to raise capital formation the country needs to boost its savings rate, which has gone down to 30.1% of GDP in 2017-18 from 33.8% in 2011-12. A major source of investment funding in the economy is household savings. Household savings have reduced from 68.2% of gross savings in 2011-12 to 56.3% in 2017-18. The decline in the growth rate of household savings has led to a lower growth in overall savings distorting the investment, growth and macro-economic stability.

Sitharaman’s Budget, however, did little to enhance savings rate. Instead, she has preferred to increase the flow of foreign funds. “FDI inflows into India have remained robust despite global headwinds. … India’s FDI inflows in 2018-19 remained strong at $ 64.375 billion marking a 6% growth over the previous year” her Budget speech read. She proposed “to further consolidate the gains in order to make India a more attractive FDI destination. The Government will examine suggestions of further opening up of FDI in aviation, media (animation, AVGC) and insurance sectors in consultation with all stakeholders.”

But more than attracting higher FDI inflows the FM has sought to “become part of the global financial system to mobilise global savings, mostly institutionalized in pension, insurance and sovereign wealth funds.”

India’s sovereign external debt to GDP (gross domestic product) is among the lowest globally. At the end of March 2019, the total sovereign debt stood at $103.8 billion, which was 3.8% of the GDP. India now plans to raise $10 billion from its first overseas sovereign bond. The idea of a sovereign bond has been discussed by Indian governments in the past, but was never pursued. Some former central bankers have reservations about the plan, as it faces risks from currency fluctuations. The problem of currency fluctuation, notwithstanding, the move to raise funds from the global market will help bridge the gap in government’s finances and would release domestic funds for corporate India. The reason for slowing down of the economy, however, is not scarcity of investible funds but of decelerating consumption which is discouraging investment. The latest example is the automobile industry, which is witnessing a rise in unsold cars. FM has done little to increase consumption, which in turn, could raise production, employment and investment to turn the wheel of the economy.