The government has already made initiative to push more credit to the economy through the credit policy of RBI. Also, there has been increasing public investment to push the economy since last few years. But all these policies have inflationary and fiscal impact. The key issue is demand management. This can be pushed only through consumption. Consumption, the mainstay of the Indian economy, has considerably slowed down in recent times. Traditional policy belief dictates, that the government take initiatives to keep more money (read purchasing power) in the hands of consumers and investors through credit policy (reducing the interest rate) and less tax (tax exemption).
The challenge is old and the solution also seems to be the old. But we can observe that in such a large economy, the multiplier effect of these policies evaporates in a short period of time and hence its effectiveness. With many benefits conferred to individual taxpayers given in the past and with rising expenditure the finance minister has less room since there is a need to control the expenditure.
Thus the circumstances before the presentation on this budget was a slowing economy, fall in aggregate demand and credit flow, and global uncertainty. With Growth rate for 2019-20, the slowest in a decade, followed by the decadal falling of the fixed capital formation rate (from 34.3 % of GDP in 2011-12 to 27.8% in 2019-20), the government faces a challenging situation in the economic front. The challenge before the finance minister was how to deliver a solid demand stimulus and growth boost, while remaining within the bounds of fiscal limits as dictated by the law. The immediate challenge is the looming negative growth rate in Agriculture and the waning demand in the automobile and the real estate sector. All these sectors have a larger ramification on multiple sectors of the economy. The challenge is not only private consumption but also private investment. Though it does not use the word slowdown even once in the statements, through the multiple objectives outlined in the Budget it seeks to solve these challenges achieve growth.
The Budget Measures:
In this context, the government came out with measures to boost investment and credit flow in the economy. The budget allocated 2.83 laks crores for rural India 1.60 lakh crores for farming, irrigational and related activities. 1.23 lakh crores for rural development and Panchayta raj. Thus rural India got a heavy dose of investment to help farmers. Improvement in consumer and business sentiment may see an upside for growth in coming quarters. This is augmented by the National infrastructure plan of 1.02 lakh crore. The Budget seems to be slowly moving towards a simpler tax regime for corporate and individuals. Providing tax relief will provide much needed consumption and investing power. providing for a tax payers charter is a welcome move and will increase much needed trust in the economy. The measure to de-criminalise civil offenses would augur well for investors and corporates. The budget has provided a major financial relief for the MSME sector. The budget has provided tax relief on ESOPs in start ups.
This budget also with its pro-rural initiatives aimed at addressing the economic aspirations of people and potential business opportunities for corporates. The budgetary allocations – which include 100 lakh croe for infrastructure development. 99,000 crores for education and 69,000 crores for health care will go a long way in developing India as destinations for investment. Some of the changes in the tax regime are significant. The financial sector has come in for special treatment. Reforms are needed to strengthen the financial sector and move it forward. To address the liquidity constraints of the NBSFC’s, the government will try to enhance the liquidity by guaranteeing securities so floated. This move might help in easing the issues in the financial system to some degree. Government guarantee could help cash strapped NBFC’sborrow at a lower rate. The tax breaks offered offered for foreing investor specifically sovereign wealth funds. Boosting investor sentiment is something the government has been focusing on. The budget is one more step towards that goal.
The budget attempts to create more spending room by letting the deficit slip. The estimated 40.000 crores revenue loss (due to the new tax regime) could result in equal demand stimulation with its own multiplier and accelerator effect. But according to observers with the falling private consumption expenditure and the meagre proportion of tax payers in the country, this may be less effective. Another concern is the falling savings rate. Any shortfall in the disinvestment target of 2.1 lakh would ultimately have to be balanced by reduced spending. The nominal GDP in 2019-20 is assumed to grow at 10 the gross tax revenue is assumed to grow by 12 %. The reliance on disinvestment is high. The finance minister will have to monitor the revenue growth so that expenditure must be adjusted such that the fiscal deficit can be maintained. However, the critical question is whether the 3.5% fiscal deficit will stick.
It is good that if the proposed government expenditures will stimulate demand. Infect out of the total fiscal deficit of 3.5% revenue deficit is 2.7%. Also, much of the overall capital expenditure of the government comes from extra –Budgetary resources. Therefore, a lot depends upon on the pick up in private investment. The question is will the budget help to create a favourable investment sentiment?
Using up whatever fiscal space the Finance Minister had to revive the economy rather than sticking to the fiscal benchmark. Also, the FRBM Act restrains the FM from deviating more than 0.5% from the deficit target of 3.3% of GDP. Thus, the budget thus turned out to be a fine act of balance between conflicting imperatives of stimulating growth and fiscal discipline.
Prof. M. Guruprasad, Director Research, Head-General Management, Universal Business School