Budget 2020: Has Finance Minister Nirmala Sitharaman set an unrealistic disinvestment target?

When evaluating the Budget it is important to ask as to what exactly is the policy supposed to address. It must be realised that the Budget is just one policy of the government like the monetary policy of the Reserve Bank of India (RBI) and that growth is engineered in any economy by the private sector through policy incentives. This is generally out of the purview of the Budget as the framework provides the contours for operation. The government can initiate private sector action by providing certain tax benefits or directly strive to push demand through expenditure. All this is done within the contours of the Fiscal Responsibility and Budget Management (FRBM) Act which nudges government to keep within prudential limits. Let us see how this has played out.

First on the prudential side, the government has stuck to the FRBM path and overtly stated that the revised number of 3.8 percent for FY20 is 0.5 percent away from what was targeted at 3.3 percent and hence is within the permissible limits under extreme conditions in the economy which has now been accepted. For FY21 it has been placed at 3.5 percent, again 0.5 percent higher than the ideal 3 percent as conditions are still not normal. All this means that there is no Big Bang announcements along the non-conventional lines and the framework are in the traditional mould.

On the taxation side the impact is quite ambivalent. While the move to lower tax rates but remove exemptions is in line with the DTC, it has been quite bold and probably not well-timed. While the Finance Minister Nirmala Sitharaman has stated in her speech that those choosing the new regime will be better off, it holds for only a certain class of people and hence may not be universal. Presently a choice is given to individuals to choose the regime and hence technically one can say that those choosing the new regime will do so if they stand to gain. Therefore, in a way this can be neutral but also means that these proposals may not give consumption a big push.

Second, the removal of the Dividend Distribution Tax (DDT) will be good for companies but their reaction to payment of dividend is important. If they do not enhance dividends, then the recipients will be paying tax on such earnings which is a negative from the point of view of disposable income. Presently, when DDT is paid, the company’s profits diminish and hence the transfer to reserves goes down. This is notional for shareholders who will not now have to pay their respective tax rates. Therefore, this may not resonate well with shareholders though company Profit and Loss (P & L) will look better as will their balance sheets.

Combining the two, the picture emerging is that the tax measures may not really lead to higher consumption and could come in the way of savings in case individuals choose to save less with Section 80C being made redundant for those choosing to invest in these instruments. Exemptions have been introduced over the years to provide specific incentives to sectors such as pensions, housing and insurance. Housing may become less attractive once these exemptions are removed especially when tax savings are the motivation. While it may not be right to overstate the case, the impact on consumption would generally be marginally positive only while that on savings can be marginally negative.

How about investment? The corporate tax rate has already been lowered and hence nothing more was expected. The Budget talks of the banking and financial sector measures which will help in the medium term but would not really lead to more lending presently. Government’s capex has increased by 20 percent which is good, but not of the variety that gives the big push to the investment cycle. The concentration remains on roads and railways and ensures continuity. It can be hoped that the states do their bit to maintain the tempo of investment.

Putting these two together, it does not appear that the Budget is big on growth and is more focused on facilitation through policy announcements (for financial sector) and spreading the limited resources more effectively by containing subsidies and working on better delivery of the same. There are measures announced which help to facilitate business, especially SMEs which is useful.

Are there any downsides? Here some of the assumptions made could be aggressive. For example, the high expectation on disinvestment raises a feeling of skepticism as a sum of Rs 1 lakh crore is hard to attain and this one talks of Rs 2.1 lakh crore. If this works out, the capital market will receive a boost, but the question is whether or not it will materialize and whether the market has the capacity to absorb such large stocks of PSUs. With LIC to contribute to the kitty through an IPO, the investor of last resort will not be a buyer in this market! Any shortfall here will reverberate on the other fiscal numbers.

Second, even in case of tax collections it is assumed that first corporate tax collection will increase which is premised on PBT being very high as the lower tax rate has to be imposed on a large number to attain the target. In case of GST and customs, there have to be more goods and services consumed. For customs collections, imports have to increase to garner such revenue. The experience in FY20 has not been encouraging which opens the door for some bit of apprehension. The GDP growth has been projected at 10 percent which is reasonable but the elasticity of tax collections assumed here could be optimistic.

Last, the Budget has a deficit of 3.5 percent which entails net borrowings of Rs 5.46 lakh crore which is higher than that of last year at Rs 5 lakh crore. This means that there could be some pressure on liquidity but given that the latter has been in abundance and a recovery is not expected in the economy in the first half as per the Economic Survey, we can expect some front loading of the borrowing programme to ensure that the impact is neutral. Therefore GSec yields may not be significantly impacted by the deficit per se.

On the whole, the Budget has been reasonable from the practical point of view. In terms of what was expected which was a ‘Big Bang’ one, it could be a disappointment as it is a normal one which will ensure that it is business as usual from Monday onwards.

The writer is Chief Economist, CARE Ratings

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