The final Budget for the fiscal year 2019-20 presented a picture of continuity in the government’s priorities over the next five years, in line with its first term. Infrastructure development, improving rural livelihoods with universal coverage of basic services and minimum income support, strengthening the MSME sector, reducing reliance on imports through Make in India and improving tax compliance and widening the tax base remain the main focus areas. The overarching goal the government has set itself is near doubling the size of the economy to $5 trillion from $2.7 trillion now. Towards that a massive investment push is envisaged with a Rs 20 trillion annual investments in railways, roads, ports, airports and affordable housing using the public-private partnership framework.
In order to finance these investments, the Finance Minister plans to deepen and develop the domestic corporate bond markets and tap into foreign capital and savings pools. The push towards increasing FDI continues in sectors like aviation and insurance, while increasing the pool of investable securities for the FPIs. Importantly, for the first time ever the central government plans to issue debt in foreign currency as a part of its market borrowing program. This step will help India to attract relatively stable global capital flows from yield seeking investors in the global bond market, which is now seeing the universe of negative yielding investment grade sovereign bonds expand to over $12 trillion, with a 100-year Austrian bond providing just about 1 percent yield. The time this is opportune to consider this avenue to augment funding sources available to the government. This move will also help Indian sovereign bonds to get representation on global bond indices, which are benchmarks for passive investors like pension funds. Any risks from such borrowings are manageable, especially considering the relatively comfortable foreign currency exchange position but the focus on macroeconomic stability will have to be maintained. This step will broaden the base of investors in the government bond market and help bring down domestic bond yields in the long run. Another measure aimed at attracting the greater passive capital flows in equities market is the proposal to increase the minimum public holding of listed shares to 35 percent from 25 percent currently. That would increase the free-float of these securities, which in turn would be helpful in improving the weight of Indian equities on global equity benchmarks over a period of time.
Reforms in the labour laws through streamlining of existing laws under four codes is also on the anvil. The Economic Survey in its blueprint for an investment led virtuous cycle of growth, highlighted the need for the same in order to help Indian firms gain in scale. The survey noted that restrictive labour regulations and perverse incentives encourage small firm size. For example, small firms (employing less than 100 employees) account for half of all organised manufacturing firms, but their share in employment is only 13.3 percent. To correct that, the survey recommended changes in restrictive labour laws, incentivizing new firms to achieve scale and phasing out existing incentives for MSMEs to enhance investments and foster job creation.
In the financial sector, along with Rs 70000 crore for recapitalisation of public sector banks, the FM also announced that the government will provide a 6-month window of limited partial credit enhancement for public sector banks to buy Rs 1 lakh crore worth of good quality assets of the NBFCs. These steps would help support the credit demands of the economy. Other than that, increasing the RBI’s regulatory remit to cover housing finance companies and greater control over regulation of NBFCs will improve the regulatory structure of the financial sector where interlinkages have increased significantly between banks and the shadow banking system.
Maintaining continuity on the tax code, the FM kept the overall direct tax code broadly unchanged from the measures already announced in the interim budget. Some changes were made to the corporate taxes. Now 99.3 percent of the corporate sector will be covered under the lower tax bracket of 25 percent. Issues related to the proposed angel tax on start-ups will be looked into and some tax sops were provided for buying electric vehicles and affordable houses. On the personal taxes front, a new surcharge has been introduced on taxable incomes above Rs 20 million. Some tax concessions were already announced in the interim budget for the small tax payeRs To shore up tax revenues, excise duty and cess on petrol and diesel has been increased by Rs 2 per litre and customs duty on gold imports has been increased to 12.5 percent from 10 percent. Going forward, the government needs to consider an overhaul of the direct tax code, by removing exemptions and reducing tax rates, to boost tax revenues and enhance returns to labour and capital.
Key budget numbers are also largely unchanged. The fiscal deficit for FY20 is projected to be at 3.3 percent of GDP versus 3.4 percent in FY19, with overall budget spending at 13.2 percent of GDP and gross tax revenue seen at 11.7 percent of GDP. As a result, the gross and net market borrowings programme size is unchanged from the interim budget estimates, which came in as a relief for the bond market. On the taxes front, gross tax collections are seen growing by 9.5 percent over the revised estimates and 18.3 percent over the provisional estimates for FY19. Compared to the interim budget, the tax collections estimates are lower by 3.5 percent, taking into account the growth slowdown. On the non-tax revenue side, disinvestments and RBI dividend have been pegged higher compared to their interim budget estimates. On the spending side, capital spending from the budget is pegged at 1.6 percent of GDP and off-budget capex by the CPSEs including the railways is pegged at close to 2.6 percent of GDP. This is lower than the 5 percent of GDP spent in FY19. On the revenue spending side, subsidies, interest payments and salaries put together account for 6.6 percent of GDP, or almost half the total budget spend. Thus there is no significant change in the quality of the expenditure.
Based on these estimates, the scope for fiscal slippage remains, in case the aggressive tax collection growth estimates made over the May tax revenue estimates of FY19, do not pan out. Similarly, the non-tax revenue growth of 15 percent over the interim budget estimates also appear aggressive. Here the government may be counting on the Jalan Committee to provide a sizeable contribution to the government in the form of an extraordinary dividend from the RBI, which may not happen. The medium term fiscal strategy statement states that the target of 3 percent fiscal deficit will be achieved in FY2020-21, which will critically depend upon the GST revenue base improving though the tax-GDP ratio is expected to remain unchanged at 11.6 percent of GDP over the next couple of yeaRs
On the whole the final budget for FY2019-20 is a reiteration of the government’s policy priorities and aims to tap further into foreign capital to support ambitious infrastructure spending plans. Fiscal consolidation rests on aggressive assumptions about taxes but the intent remains to reduce fiscal deficit and public debt. The budget was presented in the backdrop of an economic slowdown and it aims to address some of the issues holding back growth without loosening the fiscal strings. In this backdrop monetary policy will have to continue to support growth through lower rates.Gaurav Kapur is the chief economist of IndusInd Bank. Views expressed are personal.