India’s Finance Minister Nirmala Sitharaman walked a tightrope while presenting her second Union Budget. Focussing on a series of long-term reforms and inclusive growth, Sitharaman unveiled several initiatives to re-energise the Indian economy.
“She attempted to focus on a large number of areas that can potentially help better inclusive growth over the medium to longer term. If executed well, over the medium term, a number of measures announced in the budget can contribute towards better growth sustainability,” said Siddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank.
For Budget 2020-21, Sitharaman stressed on aspirational India, economic development for all and a caring society, enlisting action points for each of them.
Here’s a look at different aspects of the Budget:
Fiscal Deficit:
Sitharaman pegged fiscal deficit at 3.8% for FY20 and 3.5% for FY21. Also, on the recent debate on transparency on fiscal numbers, she assured the procedure complied with the FRBM Act.
“Pegging the FY20 fiscal deficit at 3.8% of GDP was in line with market expectation. A higher deficit would have triggered significant negative surprise and concern not only about the potential immediate additional government borrowing, but also about the government’s longer term commitment to the FRBM roadmap,” said Sanyal, adding “the FM factors in FY21 nominal GDP growth at 10%, a broadly realistic number, though materially higher than the 6% growth witnessed in the latest quarterly prints. Any disappointment on this front will complicate the job of the FM next year to meet the targeted fiscal deficit as a proportion of GDP.”
It should be noted that the government has estimated the nominal growth of GDP for year 2020-21, on the basis of trends available, at 10%. Accordingly, receipts for the year 2020-21 are estimated at Rs. 22.46 lakh crore and, keeping in mind commitment of the Government towards various schemes and need for improvement in quality of life, level of expenditure has been kept at Rs 30.42 lakh crore.
A good part of the borrowings for the financial year 2020-21 would go towards capital expenditure of the government that has been scaled up by more than 18%.
Meanwhile, while the tax collection assumptions for FY21 remain broadly realistic, one cannot rule out, headwinds as regards the non-tax revenues.
Sanyal said, “It has often been difficult for the government to meet disinvestment targets in recent years. So, the sizeable disinvestment target of FY21 will be watched closely by the market. Also, funding of the FY21 fiscal deficit hinges critically on proceeds from small savings, as per the budget maths. That might prompt the government to keep the small savings rate relatively high, which might be a stumbling block for interest rates from the banking sector to go down quickly.”
Boost to MSMEs, affordable housing
In her Budget speech, Sitharaman also stressed upon uplifting the micro, small and medium businesses. In order to reduce the compliance burden on small retailers, traders, shopkeepers etc., she proposed to raise by five times, the turnover threshold for audit from the existing Rs. 1 crore to Rs. 5 crore. In order to boost less-cash economy, she also proposed that the increased limit shall apply only to those businesses which carry out less than 5% of their business transactions in cash.
Meanwhile, reiterating government’s commitment on ‘Housing for All’, Sitharaman extended additional deduction up to Rs. 1.5 lakh for interest paid on loans taken for an affordable house till March 31, 2021.
“The spending on rural areas, affordable housing, support for MSMEs, and infrastructure was on expected lines. The push for social security programmes including healthcare, rural infrastructure such as irrigation and agriculture storage, stronger focus on education and skill enhancement remain heartening,” said Sanyal.
The bottom line
Overall, the government has made an attempt to strike the difficult balance of boosting near term growth and maintaining sustainability of debt and deficit. Sitharaman attempted a middle path rather than going for a corner solution. “A number of these measures attempts to address a set of relevant issues and, if executed well, will likely help more inclusive and sustainable growth over the longer run. However, it will be wrong to expect the budget to lead to any dramatic turnaround in the economy in the near term,” said Sanyal.
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