The Union Budge 2020-21 has put to rest the speculation among economists and commentators that the slump in GDP growth in the past few quarters would lead the economy reverting to the Hindu Rate of Growth (3.5 percent GDP growth prevailed before liberalisation) trajectory.
Going through the Budget arithmetic diligently, one could confidently say that the worst seems to be behind and the economy will see a rebound from here on. Though a nominal Gross Domestic Product (GDP) growth of 10 percent looks a little ambitious at this juncture, a more realistic 6.5 percent growth is definitely achievable provided the government spares no efforts in implementing Budget proposals in their letter and spirit and achieves the targets on both receipts and spending sides through expenditure switch favouring capital expenditure.
An enhanced government spending on productive segments will do the trick of heavy lifting of the economy and once the public capex cycle moves up private investment is bound to perk up.
Representational image. Reuters
The Budget also brought more clarity on the fiscal deficit side by pegging the deficit figures at 3.8 percent of the GDP for FY 2019-20 and 3.5 percent for FY 2020-21, showing a deviation of 0.5 percent from the fiscal glide path. Such a deviation need not worry investors since what matters is the quality of debt than the size of the debt itself. Fresh borrowings factored in the fiscal deficit figures for FY 2020-21 will, in fact, lead to crowding in private investment since the government will mostly use it to fund public investment.
The government’s infrastructure spend with a budget of Rs 1.7 lakh crore may well play out as the silver bullet to revive economic growth since it is expected to pump-prime the economy. At a time when private investment remains subdued due to weak sentiments sending capacity utilisation to multi-year lows a bump in infrastructure investment with its high forward and backward linkages will jump-start economic growth with private investment in the toe.
The deep cut in personal income tax rate with its old and new regimes seems to have not gone down well with the targeted segment. However, in the long-term, it will lead to a more transparent and simplified tax regime with fewer exemptions and deductions. It will also increase the purchasing power of the taxpaying middle-class population boosting overall consumption.
Strategic share sales in large public sector enterprises like Life Insurance Corporation (LIC), Shipping Corporation of India (SCI) and IDBI are all steps in the right direction. But the government should make public a strict time table for the divestment in these PSUs to avoid uncertainties and delays since the proposed sale of Air India remains a lingering issue despite the government sweetening the deal for potential buyers. This is of paramount importance for achieving the fiscal deficit target for 2020-21.
The doing away of dividend distribution tax (DDT) should cheer the markets while deferring tax on ESOPs by five years would light up the startup space. By increasing the cap on deposit insurance guarantee to Rs 5 lakh will boost the customers’ confidence in the banking sector, especially of small depositors.
However, markets were spooked since the Budget did not hit the bull's eye with fresh big bang reforms as expected and discounted the well-meaning initiatives for investment-led growth. But the finance minister could have done better by addressing the concerns of the financial sector by setting up a stressed asset relief fund like the US Troubled Asset Relief Fund. And there are no tangible steps to mitigate the non-banking finance company (NBFC) stress though reduced eligibility limits for debt recovery is the right move.
The new scheme to provide subordinate debt with quasi-equity features for entrepreneurs of micro, small and medium enterprises (MSMEs) by banks increases lenders options to take exposure to the MSME sector. The proposal to extend MSME debt restructuring by RBI till March 2021 may not have any immediate impact.
On balance, though, the Budget 2020-21 is a bit like the curate's egg—part in good and part in not so good—it has not led to any exuberance leave alone irrational exuberance in the market. Again to be fair to the Budget it is just the annual account of receipts and expenditure of the government. It has now become a new normal for the government to come out with big bank reforms outside the Budget, as it has done many a time in the past like the deep cut in the corporate tax cut.
(The writer is Public Interest Director, MCX)