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View: Not much to move consumer, business confidence

The mood could change once the fine print is read and numbers are crunched as even lacklustre budgets sometimes hold surprises.

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Last Updated: Feb 02, 2020, 10.51 AM IST
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PTI
PTI
By Abheek Barua

The finance minister's budget speech was an unusual instance of her saving the proverbial best (or at least the most critical from an economist’s perspective) for the middle instead of the last. Midway through the speech that lasted close to three hours, Ms Sitharaman committed to what a number of economists including her own chief economic adviser had been rooting for - using up whatever fiscal space that she had to revive the economy rather than sticking to the path of consolidation.

The Fiscal Responsibility and Budgetary Management (FRBM) Act restrains the FM from deviating by more than 0.5% from the deficit target of 3.3% of GDP for 2019-20 and 3% for 2020-21. The budget thus turned out to be a difficult compromise between the conflicting imperatives of stimulating growth and fiscal discipline.

As with all compromises, its central message comes across as a trifle half-hearted. While there are announcements and allocations galore, they lack the ability to move the needle of consumer and business confidence at least in the near term.

The mood would be better if one took a harder look at what a 3.5% deficit enables the FM to do. She can spend 13% more than last year and yet accommodate some of the revenue losses from the tax breaks that she has offered. Her number crunchers have estimated Rs 40,000-crore revenue loss from the choice offered to individual taxpayers and this is a good proxy for the demand stimulus that this tax measure could produce.

The budget is premised on the assumption of 10% nominal growth (a mix of say 6% growth and 4% inflation). This might be right at the higher end of professional forecasters’ estimates, but not entirely unrealistic.

Those who are disappointed with the absence of more overtures to the financial sector, either in the form of recapitalisation of stressed public sector banks or a commitment to buy out toxic assets that continue to impede fund flow, might draw some comfort from a measure that was somewhat innocuously slipped in. I quote: “To address the liquidity constraints of the NBFCs/HFCs, post the Union budget 2019-20, the government formulated a partial credit guarantee scheme for the NBFCs. To further this support of providing liquidity, a mechanism would be devised. Government will offer support by guaranteeing securities so floated.” This move might help in easing the logjam in the financial system to some degree. Government guarantees could help cash strapped NBFCs borrow at lower rates. It could also enable the central bank to offer cash in exchange for these securities if it were to plump for out-of-the-box measures to attenuate risk aversion in the markets.

The tax breaks offered to foreign investors — specifically sovereign wealth funds — who are willing to place a long-term bet on the economy acknowledge the fact that there is a fundamental mismatch between the supply of domestic savings and capital needs for accelerated growth.

There are some caveats to be borne in mind. While the budget attempts to create more spending room by letting the deficit slip, the government might not be able to spend as much. A number of ministries end up with unutilised allocations at the end of the fiscal year. The 13% growth rate assumed is much higher than the average 8% growth in expenditure of the past five years.

There is also the enduring niggle about the credibility of the disinvestment target of Rs 2.1 lakh crore, double that of the level targeted last year. Any shortfall would ultimately have to be balanced by reduced spending.

The revenue projections, however, look conservative. The growth in tax collections assumes only a minor increase in the tax-take for every additional rupee of GDP. The ratio of tax revenue growth to GDP growth is expected to climb from a five-year average of 1.1 to 1.2.

Going by my back-of-the-envelope calculations, the gross GST collections are budgeted at a somewhat doable Rs 1.06 lakh crore a month. The problem with the budget is that it lacks punch. The good thing, however, is that seemingly lacklustre budgets tend to hold positive surprises and it is quite possible that once the fine print is read and the numbers crunched, the mood might be quite different from this Saturday afternoon.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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