With a new Finance Minister set to take charge, the immediate task for the North Block team would be the challenge of pushing economic activity.
This comes amidst expectations of a sub-7 per cent growth rate in the fourth quarter GDP numbers to be released by the Central Statistics Office (CSO) on Friday — the first data set the new government would be faced with after taking office.
The immediate challenge would be to find resources for investments in infrastructure, injection of fresh capital in banks and providing support to liquidity-starved Non-Banking Financial Companies (NBFCs) in the upcoming budget.
The Union finance ministry has started discussions on the budget and a key theme is creating fiscal space for capital investment of around Rs 25 lakh crore annually in the infrastructure sector. There is also acknowledgment in the government that the NBFC crisis needs immediate attention, as the worsening liquidity scenario in the sector have meant many of these companies virtually stopping disbursal of fresh loans. The government is also learnt to be working on a new industrial policy with specific focus on technology and the MSMEs sector.
On the taxation front, with another two-month extension to task force formed to draft a new direct tax law and review the Income-tax Act till July 31, major direct tax reforms are unlikely this year, though some minor relief on the rates front is not ruled out. Budget targets for direct tax, however, may be lowered since there was a significant shortfall in the mop-up for 2018-19, sources said. For Goods and Services Tax (GST), though, the Budget target are unlikely to be tweaked even though it is being seen as a challenging target to meet. As per the interim Budget presented in February for 2019-20, direct tax revenues are estimated to grow 15 per cent to Rs 13.80 lakh crore, while indirect taxes are estimated to rise 11.8 per cent to Rs 11.66 lakh crore.
With its tight fiscal situation, the government may have to bank on the Reserve Bank of India. The central bank is also expected to address the liquidity issue when it meets for its second bi-monthly monetary policy review on June 6. Though the RBI has not shown keenness for a special liquidity window for NBFCs, there is possibility of more liquidity boosting measures and a possible easing of the stance, the last such space to act ahead of vagaries of the monsoons and its consequent impact on inflation.
After the IL&FS group started defaulting on its aggregate debt of over Rs 90,000 crore since last September, financial sector entities including NBFCs, mutual funds, corporate-focused lenders have faced liquidity challenges. The situation only worsened over the last month as rating agencies started downgrading debt papers issued by NBFCs, thereby weakening their ability to raise funds to do business. These issues will need attention of both the government and the RBI.
A committee headed by former RBI Governor Bimal Jalan, on the issue of determining appropriate capital reserves for the RBI, is likely to submit its report soon. In a report in April,
Bank of America Merrill Lynch estimated the Jalan committee is likely to identify an excess buffer of up to Rs 3 lakh crore. This includes the excess capital in contingency reserves and also revaluation reserves, it said, pegging the RBI’s excess capital at Rs 1-3 lakh crore. If the panel suggests transferring of past excess reserves, this could provide a booster dose of funds that can be used to capitalize banks. The panel is meeting on June 13 to discuss its report.
Stating that he is looking forward to quick action on policies from the new Council of Ministers, CII President Vikram Kirloskar said, “With proactive initiatives from the Government, the reforms pace will remain strong and pave the way for faster growth”. He further said that the economy is well set to pick up the pace of growth in the current year, with expectations of revival in rural demand, higher exports, and continued infrastructure expenditure.