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Budget 2019 | Directionally positive budget, but devoid of firepower and short-term stimulus

While the Budget has several things going for it, the budgetary arithmetic is to be taken with a pinch of salt

July 05, 2019 / 05:58 PM IST
Union Finance Minister Nirmala Sitharaman

Union Finance Minister Nirmala Sitharaman

Sachchidanand Shukla

The backdrop of the Budget was quite challenging, what with headwinds from global tariff wars, domestic growth printing sub-six percent, and the resounding victory of the ruling party fuelling hopes of a big bang budget.

Eschews Big Bang: However, the government has done well to eschew the impulse of a big bang reformist budget as it simply did not have the firepower, fiscal space or time. Note, there is already a stimulus worth 40 bps as a percentage of GDP (0.3% stimulus through farm package ie PM KISAN scheme and 0.1% of GDP worth of Income tax giveaways), imparted through the Interim Budget. The government has provided an additional push: Rs 1.5 lakh income tax deduction on interest paid for electric vehicles, lower GST for EVs from 12% to 5%; and a further push to affordable housing, with housing loan interest deductible from income tax enhanced from Rs 2 lakh to Rs 3.5 lakh for a house valued up to Rs 45 lakh. It has also hinted at a model tenancy law in the works.

Infra thrust: There has been a significant focus on national grids for water, power, gas, internet and aviation apart from the overall thrust on transportation: roads, rail, aviation, waterways. There is a PPP push: a Rs 50 lakh crore opportunity in railways. It has set up a credit guarantee enhancement corporation--it endeavors to deepen the corporate bond markets in infrastructure.

There is a special emphasis now on a water connection for every household by 2024 after the push on toilets, electricity, clean cooking fuel.


External Financing for the India story? There is a big radical shift that has been signalled. The govt has hinted at allowing a part of the fiscal deficit to be financed via overseas borrowing. This seems to be a big tactical bet on tapping cheap foreign capital for funding the India growth story.  The backdrop is that $15 trillion are currently locked into negative yields and even if a fraction of this flows into India, it can go a long way in furthering the growth story. However, financing fiscal deficit from abroad can be a double-edged sword especially for countries running twin deficits as several countries have found out. As of Mar-18, around 94% of the government borrowings was domestic. The intent seems right but needs checks and balances apart from deft execution. Done the right way, this could ease pressure on domestic rates, given the ongoing decline in domestic savings.

There have been several other vistas that have been explored on tapping global funds ie enhancing FDI norms in media, aviation and insurance streamlining, easing FPI KYC norms, investments in infra debt fund NBFCs with specified lock-in period, increase FPI investment cap in a company to the sectoral foreign investment limit, among others.

But what about the budget arithmetic?

The government has gone on to target a lower fiscal deficit of 3.3% of GDP as against the 3.4% target in the interim budget presented in Feb this year. This is where there are challenges. The government has shied away from using the actual numbers for FY19 whilst projecting the FY20 estimates.  Gross Revenues will have to clock a growth of 18% in FY20 based on actual FY19 numbers. This needs to be seen in the context of a nominal GDP growth rate of 11% and an actual nominal growth rate of 9.5% in FY19. These numbers imply a tax buoyancy of 1.7 times in Fy20 as against 1.2 times over the last 5 years.

Given the aggressive assumptions on the revenue side, a realistic assessment of the fiscal target is not possible because the expenditure numbers too would require a significant corresponding change.

Hence, it follows that the net and gross borrowings number that have been kept unchanged for FY20 at INR 4.48 tn (INR 4.47 tn in FY19) and INR 7.1 tn (vs. 5.7 tn in FY19) respectively are also under a cloud. In any case given that a bulk of the additional borrowings have been pushed on to public sector entities, these numbers don’t materially alter the crowding out story. Note, Extra Budgetary Resources (Govt fully service bonds) also stand at a huge 54k crore or 0.3% of GDP.

Sachchidanand Shukla is Chief Economist, M&M Group. Views expressed are personal.
Moneycontrol Contributor

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