Finance Minister's Difficult Test On Saturday:Budget 2020

FM’s Difficult Test On Saturday: Budget 2020

Seeing The Fiscal Arithmetic, The Task For FM to Balance Between Fiscal Deficit And Expenditure to Stimulate Economy is Not Going to Be Easy.

Shashank Vikram Pratap Singh

Ph.D. Scholar

Department of Commerce

Delhi School of Economics

University of Delhi

ssvikrampratap@gmail.com

On Saturday 1st February 2020 honorable Finance Minister (FM), Nirmala Sitharaman is going to present the toughest budget in a decade. Many difficult tasks like- whether to combat with targeted fiscal deficit of 3.3% or to stimulate consumption & investment; or to boost confidence of investors; or to revive manufacturing; or to infuse liquidity in the economy; or to enhance expenditure on social securities; or to do whatever that can bring back India's lost glory of the fastest-growing major economy in the world, keeping in mind the reaction of rating agencies over fiscal arithmetic. Looking into the status of India's macroeconomic variables, the task seems to be quite difficult for FM and her entire team.

The second-quarter financial year 2020 (Q2FY20) data revealed a sharp slowdown across many major sectors likes; manufacturing, construction, agriculture, trade, and financial services. The data reveal that manufacturing sector contracted by 1% against 6.9% growth in the same quarter in FY19; agriculture, forestry & Fishing -key sector for job creation in the rural economy grew by 2.1percent against 4.9 percent in Q2FY19; construction sector fell to 3.3 percent against 8.5 percent last year. Major drivers likes, consumption demand- measured through private final consumption expenditure data, grew by 5.06 percent compared to 9.79 percent in Q2FY19 although it's around 2 percent more than then Q1FY20; gross fixed capital formation used as proxy for government and private sector investment grew by 1.02 percent compared to 11.8 percent in Q2FY19 which is even 3 percent less than Q1FY20. The overall GDP growth rate fell to over six years low to 4.5 %.
 As compared to January 2019, the Consumer Price Index has shot-up from 1.97% to 7.35% in Dec. 2019. Meaning hereby, less scope before MPC (Monitory Policy Committee)  to ease interest rate in the coming financial year. Recently released data reveal that bank credit growth has chocked. From April to Jan. FY19 the bank credit growth was 14.50% as compared to 7.60% in the same period of FY20.

Central Statistical Organisation (CSO) has estimated the overall growth of major sectors for FY20 which is like this- GDP growth 5% lowest in 11 years; private investment, 5.8% lowest in 7 years; investment 1% lowest in 17 years; manufacturing 2% lowest in 15 years; agriculture 2.8% lowest in 4 years. Such historical slowdown is at a time when  India has neither experienced heavy drought, wars, BoP pressure, shortage of foreign exchange reserve, financial crisis nor political instability in the last few years. Amid remarkable political stability and the unquestionable single-party majority in Parliament, India has one of the highest foreign exchange reserves ($450 billion) in the world.

The government is under the extreme pressure to revive growth but seeing the fiscal arithmetic FM left with very few options. Total government expenditure for FY20 is estimated at Rs. 27.86 lakh crore and total receipts budgeted for the same financial year is Rs. 20.8 lakh crore (excluding borrowing). Meaning hereby, the estimated fiscal deficit for the same financial year is Rs. 7.04 lakh crore. But the status of actual receipts till now is quite disappointing.
 The data reveal that at the end of Nov. 2019 GOI has received only Rs. 10.1 lakh crore which is far below the budged receipts of Rs.20.8 lakh crore. GOI has not yet recovered as the sum of amount as it estimated from the disinvestment of public sector undertakings. 
Amid all these FM  issued the ordinance in Sep. 2019 to amend the Income Tax Act of 1961 and Finance Act of 2019 to reduce much dearly needed corporate tax rate on domestic and new manufacturing units by 10 to 12 percentage points respectively. This ambitious and historical reforms estimated to cost Rs.1.45 lakh crore a year. Meaning hereby, FM and her team had taken into account the collection of corporate tax by old rate while estimating the net tax revenue of Rs.16.49 lakh crore for FY20 which is an ambitious growth of 25% over the actual revenue in FY2018-19. In this financial year, GOI has received an additional amount of Rs. 86000Cr (Rs.1.76 L Cr.- 90000 Cr Estimated dividend from RBI) over and above the budget estimate, from RBI after of recommendation of Bimal Jalan Committee. But this is not enough to compensate for the revenue loss aroused from the gloomy prospect of the economy including the bleak outlook of GST collection.
 The story of the expenditure side is also quite interesting. Out of the total budget expenditure, 80% of expenditure is nonnegotiable likes- state transfer, defense, salary and pensions and many more. Meaning hereby, to boost investment, higher capital expenditure also seems to be bleak. For this financial year Rs. 3.39 lakh crore has been kept in the budget 2019, but as of Nov.2019, only Rs.2.14 lakh crore has been made available. Seeing such a negative outlook, the targeted fiscal deficit and Capex driven growth seem to be unachievable.

FM and her team have an option to either increase the slab or to decrease the rate of income tax to stimulate consumption. But whether it will have a deep multiplayer effect or not, is a matter of debate, because only 4% of people pay income tax. To curb fiscal deficit, FM  has an option to slash the welfare spending like PM-KISAN and MGNREGS but seeing the weak demand and rural stress, this option does not seem to be feasible. Raising taxes on the super-rich is also not feasible because their tax liabilities were already increased (the effective tax rate on those earning over 2 crores is 39% and those earnings above 5 crores are 42.7%)  in the 2019 budget. Thus, seeing all these prospects and the bleak outlook of the economy, it would not be a premature statement to say that the government is for sure going to disturb the targeted fiscal deficit of 3.3%.

Amid all these, the coming budget for FY21 is going to set the tone for the prosperous future of 1.30 billion Indians, although the task is not going to be easy.  Either to make capital and non-capital expenditure to stimulate high growth or to keep the fiscal arithmetic in balance, FM left with either of the two. It would be interesting to see, which of the two she is going to ride for bringing back the lost glory of the fastest major growing economy in the world.