February , 2020
Incremental changes cannot counter slowdown
17:34 pm

Rajiv Khosla

Gita Gopinath, Chief Economist, International Monetary Fund (IMF), recently stated that India’s slowdown has pushed down the global growth forecasts by 0.1%. However, the recently released Economic Survey and Budget 2020 are in complete contradiction to the observations of the IMF, wherein it is argued that India’s economic slowdown is caused due to the slow rate of global growth. The entire budget math for the upcoming year is thus structured around concealing the prevalent gloom and suppressing the fiscal deficit. Due to poor collection of revenues in the current financial year vis-à-vis budgeted figures, the fiscal deficit of the government is likely to offshoot the target of 3.3% by 0.5%.

Economic scenario before Budget

Invigorating efforts to put the economy back on track had already commenced way before the budget i.e. in latter half of 2019. Pertinently, the fiscal measures kicked off when the government implicitly agreed that rate cuts by RBI (since February 2019) have failed to offer any respite to the ailing economy. Hence, the government resorted to bank recapitalisation with an infusion of Rs. 70000 crore, slashing of corporate rates — effectively to the extent of Rs. 1.45 lakh crore, pumping of Rs. 25,000 crore for the real estate sector, merging of public-sector banks to reduce their number from 27 to 12 and unveiling of Rs. 1.02 trillion infrastructural spending plans. These big bang supply side measures are likely to take time to tender results and therefore the Indian Finance Minister (FM) was left with no other option but to hover around incremental changes only.

Need for respite  

A slew of measures, only to give a chance to the party men to blow the trumpet, were introduced without any logical outcome. An analysis of spelling irrationality out of few of these announcements is described here. Non-Banking Financial Companies (NBFCs) are allowed invoice financing to the Micro Small and Medium enterprises (MSME) sector. The caveat is that former Chief Economic Advisor, Arvind Subramaniam, in his twin balance sheet analysis has pointed towards the financially bleeding NBFCs, which the government has now roped in for rescuing the MSMEs. Similarly, Deposit Insurance and Credit Guarantee Corporation (DICGC) are permitted to increase deposit insurance coverage of depositors from the existing Rs. 1 lakh to Rs. 5 lakh. Presently, the banks are paying Rs. 5 as premium for every Rs. 1 lakh deposit covered. The question that arises here is who will bear the cost of premium now. Banks are already grappling with NPAs and if the same is transferred to the customers, then it will be another demand repressing exercise. In yet another case, new income tax slabs have been introduced by the government, where the taxpayers will have the option to stick to the old tax regime or follow the new one after foregoing the exemptions. Besides jeopardizing the 13 year low savings rate, this move rubbed salt to the wounds of banks, real estate, insurance and mutual funds companies. Perhaps this is the reason that the sensex dropped by 2.4%, the maximum on budget day in 11 years. Similarly, removal of Dividend Distribution Tax from the companies and directing it towards the recipients, ‘assemble in India for the world’ and ‘Vivad se Vishwaas’ (amnesty scheme) can only be rendered as incremental steps instead of being structural reforms.

Number game still not over

In order to augment faith in the numbers released, the FM proposed a national policy on official statistics. But, the Budget itself is not free from the jugglery of numbers. Besides, covering the deficit by pruning various types of expenditures, which is commonly done by any government, there is another serious issue. Due to the advancement of the date of presentation of the Budget, the official estimates on receipts and expenditures are available only till December and figures for rest of the quarter are extrapolated as per whims of the ruling disposition. It gives rise to a critical lag between the budgeted and actual numbers, based on which even the budgets of state governments suffer and in the absence of right to print new currency or impose additional taxes (except in limited areas), states are left only to the mercy of borrowings. In the present union Budget, the government has shown disinvestment proceeds to the extent of Rs. 65000 crore, instead of actual realisation of Rs. 19000 crore, perhaps taking the liberty that rest of the disinvestment proceedings will accrue from the finalisation of sale of Air India by March 17.

A bird’s eye view of the Budget showcases that to cover up the fiscal deficit from 3.8% in 2020 to 3.5% in 2021 with 10% nominal GDP growth rate called for trimming down of expenditures under different heads for the want of robust tax and non-tax revenues to the government. Taking this into cognizance, the FM has decreased the relative allocation towards the much-hyped schemes like PM KISAN, MGNREGA, Ayushman Bharat, PM Kisan Sampada besides cutting subsidies for the important sectors like fertilizer and food. Apparently, the move to adhere to fiscal discipline is aimed at keeping international rating agencies like Moody’s, S&P and Fitch satisfied.


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