Union Budget 2020 India: The next big policy announcement will be the Union Budget, which, as usual, has raised expectations. While a lot of announcements pertaining to different sectors have been made by the government since August, the issues on taxation have not been completely addressed, and, hence, the market expects these to be addressed on February 1. But, since changes to GST are solely within the ambit of the GST Council, it is only income tax that can be addressed. Similarly, a number of announcements have been made with respect to tax refunds and operational issues, especially for SMEs, as well as bank mergers, which obviates the need for a fresh set of measures addressing these concerns.
Two things would be important-the revised numbers of FY20, and the fiscal contours of FY21. The revised numbers are important because there has been substantial debate on the achievement of fiscal targets for FY20. More so, because when the corporate tax rate was lowered, it was officially stated that the revenue loss from this could be Rs 1.45 lakh crore. Besides, the Budget was drawn up with two rather aggressive assumptions. The first is the 7% GDP growth rate during the year; this will now be 5%, as per the CSO. The other is that the overall size of the budget, which comprises revenue collections and borrowings, was Rs 27.9 lakh crore over a revised number of Rs 24.6 lakh crore; this was surprising given that the actual number, as per accounts for March 2019, was Rs 23.11 lakh crore. The important implication, here, is that, as per the budget, the government was to raise an additional Rs 3.3 lakh crore over FY19; this would, then, amount to Rs4.8 lakh crore, based on the actual number at a time when the economy has slowed down sharply.
Therefore, the fiscal numbers for FY20 assume significance as they will also reveal the willingness to compromise on the fiscal deficit target to prop up the economy by enhancing the fiscal deficit. Hence, the questions here are: Will tax revenue collections be met? Will disinvestment of `1 lakh crore materialise even though some announcements have been made? At present, the market does not expect more than two-thirds of the target to be achieved. Missing the disinvestment target will have implications for the FY21 target, too.
On the expenditure side, the accounts show that ministries have been spending within the budgets mandated by the FM, so far. Now, with slippages on the revenue side, the obvious question to be asked is whether or not expenditures will be managed by some tweaking, especially in February and March, after the budget is presented. There are two options available to the government, here. The first is rollover of some expenses, in particular, subsidies. Last year, there was a large rollover, where the FCI had to borrow from banks to procure foodgrains from farmers. The other is cutbacks on capex by ministries towards the end of the year. These are standard ways of controlling the level of fiscal deficit, which appears almost certain to go towards 3.8-4% this year, even with these cuts. In fact, some social programmes can also be pruned. Which option is availed will be known only when the accounts are presented.
The more important announcements that will be observed are those pertaining to FY21. Income tax rates are something that households are expecting to come down. Now, at a time when GDP growth has slowed down and will probably not move beyond the 6-6.5% range for FY21, it may be hard for the FM to go in for such cuts. But, with consumption being down, there is demand for these rates to be rationalised. This will be an interesting call because the DTC spoke of lower rates, but annulment of tax deductions, which if done, may not leave households better off in net terms. At the same time, doing it upfront risks collections coming down. Therefore, this will be a tough call for the government to take, considering that there is reason to believe that the GST rates may be tweaked upwards during the course of the year as the continuous downward movement of rates has impacted collections.
Second, the fiscal target would be very important not just from the point of view of the market borrowings likely for the year, which in turn will have a bearing on RBI policy, but also because it will reveal the fiscal path chosen by the government. If the target is lower than that for FY20 (R), it would mean that the prudent path is being pursued; anything in the range of 4% or above will mean that the government will be taking on the role of a fiscal stimulus given that the monetary push has not quite worked the way it was intended to.
Third, the expenditure pattern will be of interest on two grounds that will partly be revealed in the fiscal deficit numbers. The first is the allocation for capex-Rs 3.4 lakh crore for FY20. As the government has spoken of a target of Rs 102.5 lakh crore for infra spending, of which the central government is to contribute 39%, this number should ideally be increasing. The other pertains to the social expenditure as there will be no further compulsions of elections for some time. The Rs 75,000 crore PM-Kisan scheme was a big-ticket expense announced last year, and while it would be interesting to see if the entire amount for the year gone by has been, or will be spent, the target for the next year will be important, too, as it will have a bearing on the fiscal trajectory.
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Fourth, the growth assumption will be indicative of what the government feels will happen, and while there has always been a tendency to be aggressive in assumption, it will lay the foundation for all the other numbers, especially on the revenue side. Under the present circumstances, a real growth rate of 6-6.5% could be the maximum that can be expected along with 4% inflation, thus denoting a growth rate of 10-10.5% in nominal GDP, which serves as a denominator for reckoning the fiscal deficit. Interestingly, in four of the last five years, the budget overstated the GDP growth by between 0.3-2.4%, while in FY17, it was understated by 0.5%. For FY20, the budgeted growth is 10.5% and has come in at 7.5%.
In short, this year's budget will be looked at more from the point of view of fiscal expectation and direction, with policy taking a back seat, considering that the FM has covered almost the entire perimeter of measures to revive the economy, both with regards to specific sectors as well as procedure.
The writer is Chief economist, CARE Ratings . Views are personal