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View: Sitharaman must stoke optimism in Budget 2020

There is one thing Sitharaman's upcoming Budget should focus on, bringing back optimism.

, ET Bureau|
Last Updated: Jan 28, 2020, 06.35 AM IST
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Despite the build-up in expectations, FM must have sensed by now the limitations of the Budget and rules she must follow.
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When a new, righteous regime goes about pulling down old, ugly trappings, it thrills admirers and confounds sceptics. Critics have a lurking hunch that the powers that be may have something up their sleeves. After pushing, rather fruitlessly, changes in land regulations during the first term, it embarked upon a string of rapid-fire decisions, often rolled out in clumsy haste.

Except demonetisation, which crippled many small businesses but paid off politically, few would question the intent behind changes that came in quick succession: indirect tax reform, bankruptcy code, sterner disclosure rules on loan defaults, and a law to protect home buyers. The waves of changes, however, cascaded while the largest shadow bank crumbled, tax officers turned strident and irrational, and harsh, sweeping laws to curb ‘benami’ deals, black money and fund diversion were unleashed on businessmen who had not bargained for them.

As money markets dried up and bankers, hounded by enforcement sleuths for failing to recover unpaid loans, refused to lend, big as well as small businesses struggled to avert defaults.

Large companies could not roll over old loans while small businesses, forced to fork out indirect tax every month (as against every quarter earlier) gasped as their customers (typically, large companies) held back payment. The latter, who traditionally bridged the cash-flow gap by borrowing from non-banking financial companies that accepted their cash dealings and rudimentary balance-sheets, found lenders shutting the doors. One crisis fuelled another.

The two sides of a deep political divide are engaged in a rancorous debate on whether the follies of the government have slowed the economy. But despite the government’s attempts to infuse liquidity, help troubled builders and encourage corporates to invest by cutting tax, the sequence of events since 2016 and a grim setting of a six-year low growth rate and five-year high inflation may weigh on the mind of finance minister Nirmala Sitharaman as she prepares to table her second Budget.

Despite the build-up in expectations, she must have sensed by now the limitations of the Budget and rules she must follow. About 80% of the expenditure goes in items that are non-negotiable: transfer to states, servicing borrowings, defence, and salaries and pension; of the Rs 27.8 lakh crore total expenditure (FY20 Budget Estimate), only Rs 3.4 lakh crore is earmarked for capex. Over and above this is the government’s fetish to keep fiscal deficit at a level that would satisfy rating agencies. The jury is out how far that can stretch.

Against this backdrop, if there is one thing that the Budget should focus on, it’s bringing back optimism. Probably, the quickest way to achieve this is lowering rates on personal income tax that would inevitably boost consumption — a story that had kept the economy afloat. Though only 4% of the people pay income tax, their share in the private final consumption is estimated to be as high as 40%. The impact of any cut in long-term capital gains tax (after a two-year holding period) may be short-lived if consumer demand does not revive.

It can well be a fast and fiscally inexpensive road to stoke demand. With more than 30% excess capacity in the industry, the spin offs from lower corporate tax will take time to play out.

Even tax incentive on a second home may give no immediate boost to the real estate sector as rental yields have come down and property as an asset class has lost its earlier charm. Banks and mutual funds that bankrolled finance companies are unlikely to find them creditworthy in a hurry. Even with loan lines, finance companies may find the stress shifting from the liability side of balance-sheets to their asset books if households stay away from buying cars and washing machines and small borrowers delay loan repayments.

Despite many advanced countries preferring fiscal boosts, not many would bet the government to give the finance minister a go ahead in taking a conscious risk in generously breaching the fiscal deficit. The importance of a rigid fiscal discipline is also instilled by vocal analysts with funds and banks (which book losses when bond prices fall amid higher government borrowing). In such a milieu, if the government remains tight-fisted, she must bet on households to spend. Slow offtake in consumer demand and bank loans are the big missing pieces.

Even if Sitharaman succeeds in alluring buyers through tax cuts, she alone cannot convince bankers that they would be spared of witch hunt. That makes her job more difficult.

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