Budget 2019 India:
Union Budget 2019 India: The Union Budget, presented last week, was unique in the sense of being a follow-up on the Interim Budget, presented earlier this year. There were lots of expectations from the Budget, which may not have necessarily been addressed. But, for sure, there are some points that may have been missed.
First, the speech was long and eloquent, and touched upon all the government priorities. But, as the presentation was made, there was an abrupt end to the speech without touching on the Budget numbers as such, or even the fiscal deficit target. This was a surprise, as normally the finance minister does give these numbers for a better understanding. Arguably, this was deferred to the documents that were uploaded immediately.
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Second, one of the reasons for the sudden change in the thrust of the speech may be due to the rather confused state of budgetary numbers. The Interim Budget was based on RE numbers for FY19, which kept the budget size at Rs 24.57 lakh crore. However, the Controller of Accounts had given an update on this based on actual numbers, which were much lower at Rs 23.11 lakh crore.
There was a distinct slippage in revenue of over Rs 1.45 lakh crore, which was made up for by expenditure pruning on capex as well as rollover of subsidy, which was hinted at in the Economic Survey. The Budget now still sticks to the revised number of Rs 24.57 lakh crore as the base, which is significant as all the growth rates that are reckoned will actually be on a lower number than the one used here.
Third, the size of the Budget is now Rs 27.86 lakh crore, compared with the Rs 27.84 lakh crore in the Interim document. Therefore, there has actually been no change in the overall budget allocation compared with the earlier one. This should be indicative that the government did not really do much at the aggregate level, but has moved numbers around within this overall outlay, which is pragmatic as it has worked on fine-tuning various components of the Budget.
Fourth, following from the above, the speech had spoken about the tax benefits given in the Interim Budget when presenting the follow-up Budget, indicating that when viewing the Budget one must look at both of them together rather than independently. Thus, the income tax benefit provided to some sections earlier this year was part of the overall proposals, which is fair enough. Therefore, when evaluating ‘what has’ or ‘has not’ been done, it has to be done in conjunction with the Interim Budget.
Fifth, surprisingly, the Budget still talks of Rs 75,000 crore for PM-KISAN—the cash transfer scheme for farmers. At the time of general elections, the amount was raised to Rs 87,000 crore as it was to cover a wider cross-section of farmers. However, the provision made now is unchanged at Interim Budge level, which means there will be economies here.
Sixth, the fiscal deficit target will be lowered to 3.3% from 3.4% projected in the Interim Budget. This did come as a surprise, given that nothing else has changed. On a closer look, the Budget has actually expanded the denominator by increasing the GDP at current prices at a higher rate of 12% as against 11.5% projected earlier. This is interesting, considering that the Economic Survey spoke of real GDP growth of 7% this year, which now means that inflation will be closer to 5% that is higher than the orbit mentioned by the MPC.
Seventh, the government has spoken of raising debt in global markets, which will be the first time that such a thing is done. This has been received with considerable enthusiasm, as it not only helps the government to raise funds without disturbing domestic liquidity, but also gets in forex that will stay for the period of issue and could come at a lower cost.
But such a move would mean a change in ‘stance’ that has been held so far by the government when commenting on the sovereign rating given by international rating agencies, since India never had sovereign debt. Once we do go in for such an issuance, the challenge will be to change the well-established shibboleths of global rating agencies (which the emerging markets have been voicing for over a decade now) that our rating is no better than just about an investment grade at BBB. In fact, these agencies look deeper than the fiscal deficit ratio of 3.3% and include state debt, PSU debt, off-balance sheet debt, etc, and are harsh on governments for not having labour reforms that are not consistent with domestic policies. Therefore, these will be difficult hills to climb in coming months.
Eighth, the Budget has made some curious changes in the expenditure outlays for various heads compared with the Interim one. Outlays on fertilisers, agriculture, rural development, health, transport and education are higher by a combined amount of around Rs 12-13,000 crore, with a compensatory fall in transfer to states and interest payments. The latter is interesting because this assumes that borrowing costs will be lower (about Rs 5,000 crore) either because the government will borrow cheap from global markets or that interest rates will decline further this year. This is significant because the issuance of bank recap bonds for Rs 70,000 crore will mean an annual outflow of at least Rs 4,200 crore at the rate of 6% per annum.
Ninth, the Budget also has assumed changes in the financing pattern. Interestingly, GST collections are to be lower by almost Rs 1 lakh crore compared with the Interim Budget and will be compensated for by higher excise (Rs 40,000 crore, mainly petrol and diesel to fund it), by customs (Rs 10,000 crore, higher rates on several products) and non-tax revenue (about Rs 41,000 crore) where RBI will be paying around Rs 1.02 lakh crore instead of Rs 0.82 lakh crore (Interim). One may expect interim dividend to be paid by the central bank in FY20, too.
Lastly, there has been no mention of the use of RBI surplus reserves, which may actually turn out to be the emergency cash buffer to be used for balancing the budget as it may be assumed that the RBI committee will arrive at a decision on the use of such funds during the course of the year. However, any such use will have to be done keeping in mind how global rating agencies view the move, especially so if the government plans to use the global route this year.
(The author is chief economist, CARE Ratings. Views are personal.)