Budget 2019 | A sound budget despite the absence of fireworks

Avinash M. Tripathi

After going through the budget speech presented by the Finance Minister Nirmala Sitharaman in Parliament, one is reminded of the title of the report of a committee headed by Raghuram Rajan: Hundred Small Steps. The budget as such has no overarching theme, but it does contain many implementable and concrete ideas that make economic sense.

The recently presented economic survey had hinted that the government would continue on the path of fiscal consolidation and the growth momentum will be provided through the revival of private investment. Because the debt overhang and stressed balance sheets had been at the heart of the current investment slowdown, a number of reforms have been suggested in financial sector.

The budget has signaled the government's intention to raise a part of gross borrowing in foreign currency. Further, retail participation in the government securities market will be encouraged. These are welcome measures as they signal a less repressed financial system. Taken to their logical conclusion, it implies that the government will no longer rely exclusively on the captive sources of finance, but is prepared to accept rigorous market discipline. The proposal to raise debt denominated in foreign currency is likely to be debated, as it requires a very strong risk management in public finance.

The budget also talks about the measures to develop corporate debt market. Development economists discuss the pros and cons of the institution vs market-led models of finance. With banks and NBFCs still dealing with capital adequacy and liquidity concerns, it seems the finance ministry is pushing for a market-led credit culture. This is a structural reform. However given that Insolvency and Bankruptcy Code, a precondition for the debt market, is still being tested through court cases, one is not sure how successful it will be.

The budget promises a partial, one-time guarantee to the Public Sector Banks (PSBs) for buying the NBFC assets. This measure balances the objective of maintaining financial stability and reducing the moral hazard by punishing NBFCs for their unsound credit decisions. NBFCs will see some pain as their best assets will be purchased by the banks at a discount. But at the same time, the sovereign guarantee will preclude the crisis of confidence that could potentially become contagious. This is the best policymakers could have achieved, though the effectiveness of the measure is hard to predict.

The budget does talk about the strategic sale of Public Sector Units (PSUs). This shows stronger commitment, as the budget documents typically use less bold ‘disinvestment’. It will be instructive to see if the government musters the political will to privatize some businesses which do not address any market failure.

In my last column, I had suggested some measures for the finance minister to balance the goals of fiscal consolidation and economic growth. It is interesting to read a couple of similar proposals in the budget. For example, the budget proposes a new model ‘rental law’ that will be used to replace archaic rental laws across the country. If done correctly, this will ensure investment in housing, reduce rents and even boost tax revenue. Surely a win-win formula.

The budget promises doing away with the distortionary and contentious so-called ‘angel tax’ imposed on the startups.  Not only was the deadweight cost of this tax pretty high as it was taxing risk capital, the implementation was too ad hoc and depended on the discretion of the assessing officer.

The additional surcharge on high income individuals effectively creates a new tax bracket. The implication of this measure on tax compliance, saving and investment remains to be seen. One hopes that this is a temporary deficit management measure, and it will be rolled back in future budgets.

This is a sound budget, subject to the usual caveats about the implementation. However one is left with a lingering feeling that Finance Minister could have used her massive political mandate for bolder reforms. The jury is still out on this.

Avinash Tripathi is Associate Research Fellow (Economics) at Takshashila Institution. Views expressed are personal.