Saquib Rais for BeyondHeadlines
Fiscal deficit target revised higher by big 50 basis points to 3.8% for the current financial year, spending has been cut across social sector, FY20 disinvestment target missed by huge margin, no clear benefit in the income tax for salaried class -these are some of the features of the Union Budget 2020-21 that show that India is in a deep financial malaise currently.
While presenting the Budget in Parliament on Saturday, Finance Minister Nirmala Sitharaman mentioned the GDP growth rate of 7.4% for 2014-19 and 10% for FY21 while leaving out the economic growth for the current financial year. According to the government’s own estimates, the growth is likely to slow to over 11-year low of 5% in the current fiscal. Not mentioning this figure in the Budget is astonishing. It shows something is not well in the economy right now.
Moreover, for the FY21 projections, the government had to resort to nominal GDP growth rate. It projected economy to grow at 10% in terms of nominal GDP. How much of real growth this means depends upon its break-up — how much is inflation and how much is real GDP growth in this nominal GDP projection. However, the Economic Survey 2019-20 on Friday showed real GDP growth at 6-6.5% for FY21. Many analysts doubt whether this target can be met or not during the current economic situation.
This government is known for its fiscal prudence and conservatism. But this time, it had to breach the fiscal deficit target of 3.3% estimated earlier by 50 basis points. This was done using a provision called ‘escape clause’ in the Fiscal Responsibility and Budget Management Act, 2003. The provision provides for an option to the government to breach fiscal deficit by up to 50 basis points in times of economic recession. Exhausting the entire 50 basis points limit reinforces the fact that there is deep distress in the economy. Many experts doubt the actual deficit to be in the range of 4.5-6%. FY21 fiscal deficit has been pegged at 3.5%.
Stock markets follow the Budget announcements very closely and react accordingly. On Saturday, before the Budget Speech, the BSE Sensex was in the green expecting some big announcements to boost the economy. But as the Budget Speech started, the Sensex began tumbling and remained in the red throughout the Speech, indicating that Dalal Street was disappointed with the Budget. Finally, the Sensex ended the day with a loss of 987 points to 30,735. This was the biggest single-day decline in over a decade.
The current economic slowdown has been attributed to muted demand due to low consumption. Measures to boost consumption growth was expected in the Budget. In the name of giving a fillip to the consumption by raising disposable income, it introduced a new optional income tax regime with low rates. However, to avail the lower rates, taxpayers have to forego certain exemptions and deductions, including those currently available on tuition fees, HRA, LTA, and a standard deduction of Rs 50,000, and under Section 80C of I-T Act.
After leaving the deductions, the new tax regime is not going to benefit much. Also, it in fact taxes more in most cases. So, taxpayers are unlikely to opt for it and will continue to stick to the old slabs. Here, the Budget fails to give a fillip to the disposable income.
The abolition of exemptions will pull out the incentives for a retail investor to put money in the financial instruments, including ELSS mutual funds.
Interestingly, in the post-Budget media interaction, Sitharaman said the exemptions and deductions will be done away with for all in the future.
The most interesting part of this Budget was disinvestment target. The government has fixed disinvestment of Rs 2.10 lakh crore for FY21 — Rs 90,000 crore from IDBI Bank and LIC stake sale and Rs 1.20 lakh crore from disinvestment in other CPSEs.
Let me explain the chronology to show how unrealistic this target is. In the last year’s Budget, the government had fixed a target of Rs 1.05 lakh crore in disinvestment. Now, in the Budget on Saturday, Sitharaman said the target will not be able to be met and, hence, the government is expecting to garner l Rs 65,000 crore, half of the original target. Out of this Rs 65,000 crore, the government has been able to mop up just Rs 18,000 crore so far. In the past 7 months, it mopped up only Rs 18,000 and in the next two month, it plans to raise another Rs 47,000 crore. It seems almost impossible. Moreover, for 2020-21, it has set another whopping target of Rs 2.10 lakh crore. This seems to be just a number that doesn’t have substantial backing on the ground.
The government’s plan to offload stake in Life Insurance Corporation seems very difficult to materialise. LIC is estimated to be the most valued firm in India — bigger than Reliance Industries and TCS in terms of market capitalisation. Its stake sale via IPO will suck liquidity from the market and, hence, create more complications for the economy.
The Budget 2020-21 does not raise social sector subsidies very much, given the financial constraint. The Economic Survey 2019-20 said that the government’s food subsidy bill has risen from Rs 1.13 lakh crore in FY15 to Rs 1.71 lakh crore in FY19. The rising subsidies need to be addressed and PDS rates should be “revisited”. This is just an acknowledgement of hardships in the government financials.
The decision in the Budget to raise insurance deposit coverage from Rs 1 lakh to Rs 5 lakh and no provision for bank recapitalisation this year may just leave the financial sector bleeding in case of any further escalation in current financial sector crisis. Although the Economic Survey introduced ‘Health Score’ to detect early-warning signal in NBFCs, it is just a diagnostic tool for the future and not a measure to address the ongoing stress in the financial sector.
Finally, the decision to shift the dividend tax burden from companies to investors will work as a counter-attractive measure.
So, the Budget not providing any substantial relief to any strata of society and missing most of the targets by huge margins points to an alarming situation that needs to be addressed immediately.