Budget 2019 makes vote banks happy, but rating agencies, FIIs not so much

Budget 2019_Piyush Goyal

Madhuchanda DeyMoneycontrol Research

Finance Minister Piyush Goyal has tried to placate the majority of the ruling BJP's voter constituencies in his pre-election Budget. But a very important constituency that he has overlooked in the process is the one which is watching the Budget from abroad – the rating agencies and the foreign institutional investors (FII), who would certainly be spooked with the large deviation from the path of fiscal consolidation.

Has the government addressed all the voters who matter in terms of the numbers?

Certainly yes – starting from the farmers in distress to the vocal middle class.

For the farmers, rather than holistically addressing the issue of indebtedness, what has transpired is a marginal dole out of Rs 6000 per annum (Rs 500 per month) under “Pradhan Mantri KIsan Samman Nidhi (PM-KISAN)”. The scheme is available to small and marginal farmers (owning less than 2 hectares of land).

Interestingly, as per the latest Agricultural Census, the small and marginal holdings taken together constituted 86.21 percent of the total 146 million operational holdings in the country. The average size of operational holding has declined to 1.08 hectare, so the move indeed has a wide coverage of the addressable constituency. The Finance Minister has mentioned about covering 12 crore farmers with a total outlay of close to Rs 75,000 crore in FY20 and Rs 20,000 crore in FY19, translating to 0.36 percent of GDP in FY20.

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While this move partially explains the fiscal slippage in FY20, but Rs 500 per month is too little to provide dignified living to the extremely indebted and can at most encourage consumption of basic staples and also run the risk of prompting consumption of sin goods.

The second constituency he addressed is the 42 crore workers employed in the unorganised sector. A pension scheme namely 'Pradhan Mantri Shram-Yogi Maandhan' has been announced for the unorganised sector workers with monthly income upto Rs 15,000.

This scheme promises monthly pension of Rs 3,000 from the age of 60 years on a monthly contribution of a small affordable amount during their working age with the government depositing an equal matching share. With an outlay of Rs 500 crore, it doesn’t cost much to buy the loyalty of this large group.

Finally, to address the middle-class vote bank, relief has been provided to taxpayers having total taxable income up to five lakhs, instead of the existing three and a half lakhs. The maximum amount of tax rebate has been increased to twelve thousand five hundred rupees from the existing two thousand five hundred rupees.

The move is expected to positively impact close to 3 crore taxpayers (nearly half of the total base) and would cost the exchequer Rs 18,500 crore or 9 basis points of the GDP. This too is a rather small price for buying the allegiance of a large voter base.

But in trying to appease all its key constituencies, the path of fiscal discipline has been completely overlooked. While the slippage in fiscal deficit to GDP ratio in FY19 from 3.3 percent to 3.4 percent was well within the expected range, what came as a surprise is the fiscal deficit figure of 3.4 percent for FY20.

More importantly, the additional revenue expenditure is not adding to any productive capacity and could well be potentially inflationary and could hamstring RBI from reducing rates in the near term.

With the path of fiscal consolidation now pushed to FY21 and beyond (3 percent fiscal deficit targeted for FY21 as per the new roadmap), it remains to be seen how India is viewed by the rating agencies as well as the foreign investor community.