Expectations from the Budget for 2020-21 were running high because of the background against which the Budget had to be prepared. There were three disturbing trends in the economy-

  • A perceptible slowdown in the growth
  • A steep fall n investment rate
  • A stressed financial system

The Budget was expected to address all these issues and also lay a foundation for a significantly faster economic growth. Otherwise, the $5 trillion economy will be only a distinct reality.

Overall the Budget is well intentioned, even though it does not use the word ‘slow down’ even once. It outlines at length the multiple objectives it seeks to achieve. While the expenditure programmes may show how demand will be revived, the revenue projection along with the fiscal deficit will indicate whether expenditure programmes are sustainable. It is to this scrutiny we turn our attention. 

The nominal GDP in 2019-20 is assumed to grow by 10%. This is realistic. The gross tax revenue is assumed to grow by 12%. Thus the buoyancy is greater than one which did not materialise in the current year. The reliance on disinvestment is high while there maybe special circumstances such as LIC disinvestment which maybe helpful. However, the disinvestment target has in the past not been fulfilled in any year.

The financial ministry have to monitor the revenue growth so that the expenditures must adjusted such that the fiscal deficit can be maintained. In fact, taking the expenditures as given, the possibility of the government exceeding the budget’s fiscal deficit is very much there. The escape clause should be seen as permitting the government to exceed the implicit mandate of 3% rather than over and above what is budgeted. It is hoped that the government would not by invoking the ‘escape clause’ ask the RBI to enter the primary market in government paper. 

Some of the changes in tax regime are significant. A major effort was made some months ago to cut the corporation tax rate. In this budget, some steps have been taken in the direction of simplifying personal income tax. The impact of this maybe very limited. In fact, the board principle of reducing the tax rate along with withdrawing exemptions must be taken to the logical end and must cover the entire gamut of personal income tax. We should move towards a single regime rather than give options. 

Several of the measures proposed may help to accelerate the inflow of funds from abroad. The withdrawal of Distribution Divided Tax is welcome, particularly on equity grounds. While relaxation in investment by non residents in government paper in rupee terms is acceptable, caution must be exercised. Easy access should not pave the way for larger borrowings. 

Bulk of the time was spent by the financial minister on explaining the various programmes in different sectors. Quite clearly, sector experts must examine how relevant these expenditures are. More importantly, much depends on how they are implemented. The overall expenditures show a rise of 12%. Within that capital expenditures are expected to increase 18%. However, the ratio of capital expenditure to GDP stays at 1.8% which is average over the past few years. 

The financial sector has come for special treatment. Reforms are needed to strengthen the financial system and move them forward. As far as the banking system is concerned, the crucial question is not so much mergers as the extent of the total banking system which the public sector wants to own. The action related to IDBI gives us some idea. The second important form measure is to determine the ‘arm’s length’ the government and the board of management of public sector banks. Efficiency is a function not only of technology but also the structure of the organisation. 

The budget was expected to stimulate demand and to raise the level of capital formation which has fallen by six percent points over last eight years. The level and pattern of government expenditure is key to stimulating demand. If the expenditure programmes are put through with dedication and commitment, it will help in this direction. Implementation is the key. As for stimulating investment, the government’s own participation is still limited. The driver of deficit is not investment. Much of the over all capital expenditure of government comes from extra budgetary resources. Therefore a lot depends on the pick up of private investment. Will the budget help tio create a favourable investment sentiment? Only time will tell. 

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