As in the case of the past two budgets, this year’s has to be presented against a background of several concerns that include slowdown in economic growth, inadequate private investment, agrarian distress and problems in the financial sector. The budget reflects these concerns and provides a host of measures to address them. But much will depend on implementation.
The fiscal deficit is now pegged at 3.3% of GDP, which is a shade lower than what was indicated in February’s interim budget.
This shows a commitment to stick to fiscal consolidation. But much will depend upon how the revenue projections will hold. In fact, the Economic Survey expected the real GDP to grow at 7% in 2019-20. But there are doubts about whether this will happen or not.
The nominal GDP in 2019-20 is assumed to grow by 12%. This implies a rise in prices of 5%. According to Budget Estimates, the gross tax revenue is assumed to grow at 9.5%, which certainly isn’t high. In fact, gross tax revenue as a percentage of GDP is expected to come down from 11.9% in 2018-19 to 11.7% in 2019-20.
However, non-tax revenue is expected to grow at 27.7%. Within it, dividends and profits are budgeted to grow at 37%.
The reliance on the non-tax revenues is certainly high. The finance ministry will have to keep a constant watch on the revenues and should be willing to adjust expenditures, if the revenues don’t grow at the desired rate.
The tax changes are minimal. But some of them are significant. The lower corporate tax rate covers most of the companies.
It hasn’t been extended to all, presumably because the companies left out are the ones that contribute significantly to the tax revenue. It isn’t clear whether the change will contribute to a change in investment sentiment.
The surcharge on income-earners above Rs 2 crore will be really biting. It will also antagonise state governments, because this revenue will not be shared with them.
The tax concession given to affordable house-owners is welcome and can have a direct impact on investment.
Tax concession on purchase of electrical vehicles is also welcome. GoI must rethink on the imposition of customs duties on certain products as this is a reversal of the trend since liberalisation. It will create unnecessary controversies globally.
The increase in the excise duty and cess on petrol and diesel will put GoI in trouble if crude prices start rising.
Finance minister Nirmala Sitharaman spent bulk of her time dealing with several programmes in different areas. These are obviously in the right direction. But the concern with all expenditures is how well they are implemented and what impact they have. While total expenditures are expected to rise by 13.4%, capital expenditures are to rise by 9.4%. The ratio of capital expenditures to GDP remains at 1.6%. Thus, in GoI’s direct contribution to investment, there is no change.
The budget has several proposals relating to reform of several sectors.
Prominent among them are relating to financial sector. The proposal for GoI to borrow in foreign currency does not appear to be correct. This essentially means the exchange risk is borne by GoI, unlike the situation in which foreign investors are allowed to invest in government bonds in rupees. Second, there is certainly no need for GoI to borrow as the foreign inflows are adequate.
There are a number of other issues relating to NBFCs and housing finance on which there can be difference of opinion.
The tax on cash withdrawals is not incorrect in principle. But clever people can get around this in a number of ways.
Both the Economic Survey and Sitharaman talked of private investmentdriven growth. Will the totality of the measures introduced in the budget help in accelerating investment? As mentioned earlier, capital expenditure of GoI as a proportion of GDP remains the same. The other programmes, such as those relating to highways, are financed by non-budgetary resources.
There is, however, no measure in the budget that will result in an increase in private investment. But if the budget as a whole helps to create a favourable investment sentiment, it will help.
The writer is former governor, RBI