The markets have not taken kindly to Nirmala Sitharaman’s second Budget, with the BSE Sensex falling 988 points or 2.4 per cent on Saturday. But they may have been expecting too much from a government, which is in no position to deliver a fiscal stimulus to kickstart the virtuous cycle of investment and growth that many believe the Indian economy badly needs today. Sitharaman’s latest Budget should be seen in the context of the limited financial resources as well as state capacity for undertaking any major public expenditure push to offset subdued private consumption and investment demand. The Budget is an admission of this reality.
India’s past experience with fiscal stimuli — such as that in the aftermath of the 2008 global financial crisis — shows that these have inevitably ended up creating inflationary pressures and external account imbalances down the line (remember “twin deficits”?). To that extent, Sitharaman should be given credit for not trying to do too much. The Centre’s fiscal deficit for 2020-21 has been pegged at 3.5 per cent of GDP, below the 3.8 per cent revised estimate for the current financial year. This seems achievable at least compared to 2019-20, which had originally targeted a number of 3.3 per cent assuming a 12 per cent nominal GDP growth. The latest Budget’s assumptions are less ambitious with respect to both nominal GDP growth (10 per cent) and gross tax revenues (the estimate of Rs 24.23 lakh crore is actually lower than the Rs 24.61 lakh crore that was expected in 2019-20). Simply put, with tax revenues in the current fiscal alone expected to fall short of the Budget estimate by nearly Rs 3 lakh crore, and no certainty of a substantial improvement on that score, there is little room for a 2008-09 like stimulus now. That is a reality that needs to be factored in by all market players.
While the Budget offers no stimulus, the disinvestment target of Rs 2.1 lakh crore — nearly thrice the Rs 65,000 crore for this fiscal — is something worth taking note of. Sitharaman has announced plans for an initial public offering in the Life Insurance Corporation of India (LIC), besides corporatising and listing of at least one major state-owned port and monetising already built highways. If these are a precursor for a mega privatisation programme of the sort seen during the Atal Bihari Vajpayee-led NDA regime, that can potentially be a sentiment changer. The Narendra Modi government has until now refrained from implementing any bold stake sale initiative, while actually draining the cash reserves of the LIC, ONGC or NTPC to buy its stakes in other public sector undertakings to meet disinvestment targets. It is high time India re-embarks on genuine privatisation — à la NDA-1 — which can, in turn, create the fiscal space for enhanced public investment.
There are a few other welcome proposals as well. Among them is the 100 per cent tax exemption on interest, dividend, and capital gains income on investments made by overseas sovereign wealth funds (which is good for attracting long-term money to finance infrastructure projects), the removal of dividend distribution tax (which will encourage corporates to give back more to shareholders, thereby boosting stock valuations), enhancing the limit for foreign portfolio investments in corporate bonds from 9 per cent to 15 per cent of the outstanding stock (which, along with the decision to keep fiscal slippage within limits, should help prevent domestic interest rates from rising), and a five-fold increase in bank deposit insurance coverage to Rs 5 lakh (necessary to bring back trust in the financial system, especially after the collapse of Punjab and Maharashtra Co-operative Bank). These are measures that, similar to the slashing of corporate tax rates in September, will do good in the medium to long run.
The Budget, however, also has proposals that range from introducing unnecessary complexity to outright bad. In the former category is the creation of new slabs as well as rates for income tax payers. Earlier, there were just four taxable income slabs; now there are seven. The number of rates have also gone up from three to six. On top of these, by linking the new slabs and rates to tax payers not availing exemptions and deductions, the government has gone back on the goal of making the tax regime more simple and transparent. If the idea was to stimulate consumption through tax cuts, that should have been done in a straightforward manner, unlike the current proposals which make computation of liability a tedious exercise for the ordinary taxpayer.
The real negatives in the Budget have to do with raising customs duty on a host of items, from dairy and footwear to household appliances, and taking absolutely no action on subsidy rationalisation. The fertiliser subsidy is expected to fall from almost Rs 80,000 crore in 2019-20 to Rs 71,309 crore in the coming fiscal, but there is no mention of any increase in retail prices of urea to enable the same. Even more scandalous is the food subsidy. For 2019-20, the Budget had originally provided Rs 1.84 lakh crore, which has come down to Rs 1.09 lakh crore. For the coming fiscal, the food subsidy is scheduled to go up only marginally to Rs 1.16 lakh crore. In both cases, the formula adopted is the same: The burden of selling nutrients, rice and wheat way below market rates has been simply transferred to fertiliser firms and the Food Corporation of India, who will have to borrow more from the market or the National Small Savings Fund to fund these losses. Subsidy rationalisation could have been the other source of revenue (apart from privatisation) for the fiscal stimulus that the economy would certainly have benefited from. Sadly, the Modi government has squandered this opportunity yet again.