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Can't expect anything radical this time from Modi 2.0, govt's entire focus will be on matching all numbers

Madan Sabnavis
The prime minister has already increased the cash transfer scheme allocation to Rs 87,000 cr as it will include more farmers now.

Preparing a Budget is always a challenging task given that there are several constraints in terms of what the government can do as the resources are limited. While critics like to talk of budgetary numbers not being met or compromises being made along the way, the fact is that the Budget, which is presented in an inexact science. Revenue targets are drawn up based on assumptions of tax collections, which are dependent on underlying growth. In FY19, the challenge was to also tackle to constant tinkering of Goods and Services Tax (GST) rates which affected revenue collections. The government does have the prerogative to defer refunds and show better numbers but at the end of the day, if the revenue collections are lower, the axe has to fall on the discretionary expenditure.

Expenditure adjustments are twofold. First, there are some which are rolled over like food subsidy was last year where the payments will be made this year and hence it becomes a rolling payment. Second, certain discretionary expenditures can be pruned which was done this time too as capex came down. Hence, while the fiscal deficit was maintained at 3.4 percent of the Gross Domestic Product (GDP) for FY19, several items were compromised. And fundamentally, there is nothing amiss if we are committed to the fiscal deficit ratio being contained at a predefined level.

For FY20, let us look at what would be the things to watch for on the revenue side. First, the tax rates and hence collections. There has been a constant demand for the corporate tax rate to be cut which has been done for the smaller companies but not the larger ones which are the high investors in capital. This will have revenue implications but can help to push the economy forward. Besides reducing the tax rate to 25 percent was an indication given in the National Democratic Alliance-1 (NDA) regime and hence would be expected to play out this time. Linking it with investment would be the right way as it incentivises companies to look at the capital formation.

Second, there have been some high-level debate on the use of the Reserve Bank of India (RBI) reserves for funding the Budget. While there are arguments on both sides, it is expected that the Bimal Jalan Committee would advise the way ahead which is important because a substantial amount of money can be released over a period of time which goes beyond the annual surplus and interim dividend that is passed on to the government.

Dipping into the reserves can be a one-time affair and has to be used judiciously and ideally should be for bank capitalisation or a similar such venture. The amount involved could be upwards of Rs 1 lakh crore and hence can play an important role in the Budget formulation.

Third, disinvestment has become a popular source of revenue for the government as the amount can now cross Rs 1 lakh crore. While the route followed has not always been convincing as it involved public sector undertakings (PSUs) buying the equity of other PSUs, it has been a useful source of financing the Budget. It is likely that this will be aggressively pursued.

Fourth, the other tax rates including income tax as well as some indication on the GST rates will be useful (though the latter may be the prerogative of the GST Council). This becomes important at a time when there is a need to boost consumption. While the focus in most budgets is to provide relief at the lower end of the income scale, there may be merit in examining such benefits at the middle and higher levels if a significant push has to be given to spending. Direct tax benefits help immediately while GST revisions would work with a time lag.

As can be seen, the scope for increasing revenue outside borrowing has its contours well defined with known tradeoffs which have to be considered by the government. On the expenditure side, it would not be prudent to expect any big bang announcements. The prime minister has already increased the cash transfer scheme allocation to Rs 87,000 crore as it will include more farmers now.

Capex too is more or less anchored in the Rs 3-3.5 lakh crore range and unless there is a conscious decision to increase the size of the fiscal deficit which is quite unlikely, it looks difficult to include anything new. Most expenses are more or less committed like salaries, pensions, subsidies, interest, defence, etc. There does not appear to be much space left for enhanced expenditure.

It will, however, be interesting to see if the Budget has something to say on the public sector bank (PSB) recapitalisation. The interim Budget was silent on this score. The performance of the PSBs has improved and it may be expected that more banks would be out of the PCA framework this year. In such a situation there will be demand for capital which has to come from the government. There are options of issuing recap bonds which was done earlier or earmarking RBI reserves for the same. These would be Budget-neutral in a way (though interest has to be paid on recap bonds in future years).

Will there be any other policy announcements in the Budget? This looks unlikely as the respective ministries will have to address pending issues. The ministry of finance may not have anything new to offer this time as the focus will be on matching all the numbers. It will be useful if there is more transparency in terms of presentation of figures for off-Budget activity which today has become quite significant as it provides cover for the fiscal numbers. If this can be done, it would become easier to understand the implications.

(The writer is chief economist, CARE Ratings)

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