The actualisation of healthy corporate income tax assumptions will critically depend on how rapidly the broader economy turns around, and how quickly consumption spending picks up
A day after Nirmala Sitharaman took oath and assumed office as the finance minister in New Delhi’s stately North Block on Raisina Hill, a team of top bureaucrats briefed her about the state of the economy to bring her up to speed with the prevailing policy and fiscal architecture.
Nothing unusual about it. Only that it was just a week after the Bharatiya Janata Party’s (BJP) landslide election victory to win a second term and about a month before the presentation of the Union Budget. The task: strike an equilibrium between fiscal realism and soaring expectations.
As a trained economist, Sitharaman may well have been reminded of `constrained optimisation’, a commonly used concept in economics that characterises finding the best set of solutions when confronted with a variety of challenges. In the real world, the ideal solution for one set of problems can end up impairing other goals.
Should one borrow more to fund far-reaching schemes such as getting piped potable water to all households by 2024? Or should the government call upon the rich and the middleclass to bankroll the scheme by foisting a new levy on them? Should the salaried and the middle class be obliged with tax breaks hoping that it will trigger a cycle of spending, investment and, eventually, hiring? Where is the extra money for capital expenditure going to come from if the government were to raise its spending on building assets? What if interest rates for households shoot up because extra government borrowing “crowds out” the private sector from the loan market?
The compromises can be fiscally slippery and politically sensitive. As it turns out, Sitharaman’s first Budget is a smart piece of work on fiscal trade-off that seeks to marry welfare economics with expansionary objectives.
At Rs 3,34,234.57 crore, central subsidies for 2019-20 stood at 11.9 percent of total expenditure. This compares creditably with last year, when subsidies as a proportion of total central expenditure stood at 12.1 percent.
Since 2014, there has been an evident emphasis on cutting back revenue expenditure. A central piece of the strategy to achieve this is to keep subsidies at well below 2 percent of GDP. For 2019-20, subsidy expenses stand at 1.6 percent of the projected nominal GDP of Rs 2,10,07,439 crore, compared to 1.4 percent last year.
Effectively, of every Rs 100 worth of goods and services produced in the country, only Rs 1.6 will be spent on anti-poverty programmes or handouts that help keep food, fertilisers and some fuel prices affordable for the poor.
This is despite the sharp rise in minimum support prices (MSPs) for 14 summer-sown kharif crops last year. A state-supported MSP mechanism acts a cushion, cuts the dependence on private wholesale buyers, and helps fix a minimum floor price that farmers are almost guaranteed to get even if markets are swamped by an abundant harvest collapsing mandi rates.
The government has set the MSP at a minimum of 1.5 times the cost of cultivation, a proposal made in the Budget for 2018-19, based on Commission on Agricultural Costs and Prices (CACP) calculations. This was the biggest increase in the Narendra Modi government’s first tenure, which has pushed up the food subsidy bill by 7.5 percent to Rs 1,84,220 crore in 2019-20 from Rs 1,71,298 crore last year.
Sitharaman probably was also deeply conscious of the need to force public investment, particularly at a time of depressed private investment. She did not wield the knife on the Centre’s capital expenditure, pencilled in Rs 3,36,293 crore for spending on productive assets with multiplier effects, higher by 6.2 percent over last year’s Rs 3,16,623 crore, a sign that public investment will gather speed in coming months.
Another big constraint was the critical need to accelerate household spending, which accounts for more than half of India’s GDP. India's gross domestic product (GDP) grew 5.8 percent in January-March, and 6.8 percent in 2018-19, lower than previous year's 7.2 percent. The growth in GDP was slowest since 2014-15.
Slowdown has been visible since last year with deceleration signs that were emanating from a slew of shop-end data such as car and consumer goods sales, often seen as proxy indicators to gauge trends in household spending.
The tricky bit, however, is how not to slide down a fiscal slope. The cost of a universal cash transfer scheme of Rs 6,000 a year for all farmers under PM-Kisan will cost an additional Rs 12,000 crore in 2019-20, from the previously estimated Rs 75,000 crore when the scheme was limited only to farmers owning only up to 2 hectares of land.
How does the government hope to find money for all of these? The finance ministry expects to collect Rs 13.35 lakh-crore from individuals and corporates, a growth of 11.25 per cent over the previous year, but still lower by 3 per cent compared to Rs 13.82 lakh-crore set in the interim budget.
The revenue growth is also based on 14.1 percent projected growth in corporate income tax, predicated on 12 percent nominal GDP growth for 2019-20. The actualisation of healthy corporate income tax assumptions will critically depend on two known unknowns: how rapidly the broader economy turns around, and how quickly consumption spending picks up.
Four big variables in Sitharaman’s fiscal maths compared to February 1, 2019 and now is: dividends from the RBI and banks, as also from public sector enterprises (PSEs), earnings from telecom spectrum and licence fee; and disinvestment receipts.
The government has projected to earn Rs 1,06,041.56 crore as dividends from RBI and banks in 2019-20, up 43 percent from Rs 74,140.37 crore in the previous year. Equally, the government now expects central PSEs to pay dividends worth Rs 57,486.88 crore in 2019-20, 27 percent higher than last year.
Communication revenues, primarily licence fee at 8 percent of the Adjusted Gross Revenue (AGR) and spectrum, is set to yield Rs 50,519.81 crore in 2019-20, up 29 percent from the Interim Budget estimates of Rs 39,245.00 crore. This could well be a sign that the government intends to quickly move on 5G spectrum sales in coming months.
Also, the government now expects to earn Rs 1.05 lakh crore in 2019-20 through disinvestment, selling stake in state-owned companies. This is higher by 16 percent than what it had projected in the Interim Budget.
The robust tax revenue growth assumptions mirror the government’s optimism about the economy’s fundamentals, but it is the borrowing plan that the bond and equity markets are looking with a bit of anxiety. The welfare necessities still have not forced the finance minister to cede on consolidation goals to peg the fiscal deficit at 3.3 percent of GDP for 2019-20, lower by 0.1 percentage points of 3.4 percent estimated in February. What if the revenue assumptions turn awry? How will the government then plug the gap? These are questions floating in the markets.
For now, though, Sitharaman has made it abundantly clear that the time to decisively shift the terms of trade in favour of farmers has come. Plunging food prices have meant farmers’ incomes have remained flat or slump, even when non-food items they buy and consume continue to get costlier.
The 2019-20 Budget may well be remembered for making a pivotal shift in the India’s policy making attitude of looking at the farm economy from a mindset of deficit to that of approaching it through a prism of surplus.The government’s message is clear and loud: Farmers, and small and medium enterprises, need handholding. Their time for primacy in policymaking has come.