Union Budget 2019: Nirmala Sitharaman presents ‘no-change’ Budget; one mustn't read too much into numbers
The Budget speech had spoken of what all has been given in the interim Budget and not made any concession here. Therefore, there is nothing specific for households here.
Borrowing programme has not really changed means that there will not be any untoward pressure on liquidity
The proposal of Rs 70,000 crore for bank recapitalisation is good as it will help banks lend more
For investment, there is nothing specific as the government capex would still be in the Rs 3.4 lakh crore range
The Union Budget announced on Friday was not really expected to do anything radical given the constraints that were there in the interim Budget numbers. As fiscal prudence has been the stated path, the fiscal deficit number had to be adhered to which has been marginally bettered to 3.3 percent. Should the markets be happy?
First, the fact that the borrowing programme has not really changed means that there will not be any untoward pressure on liquidity and it is business as usual as the Rs 7.1 lakh crore of gross borrowing has been buffered in the Budget. Small savings will be relied on for Rs 1.3 lakh crore, which will be coming at a lower cost now. There was some mention made on looking at borrowing in global markets, but this should be taken as a thought only as there is no provision made in the Budget.
Second, the expenditure numbers have not really changed perceptibly which means that expenses are on track and there are neither big bang changes nor economies induced.
Third, there are some changes announced like bank capitalisation. The number of Rs 70,000 crore is good as it will help banks lend more. However, it does not strain the Budget as this will be backed by special securities to be issued which is what the bank recapitalisation bonds are all about. This will help prop up the public sector banks (PSBs) which need funding.
Considering that more banks are coming out of the prompt corrective action (PCA) and would like to get back into the mainstream, such capital will help. Such capitalisation is largely Budget neutral as they are accounting changes.
The government issues bonds with a coupon rate which is subscribed for by banks which do not pay for it as the money is put back as capital. The only cost is the interest and at 7 percent coupon would cost around Rs 5,000 crore, which is small in a Budget of Rs 27.86 lakh crore.
One would wonder as to how the fiscal deficit actually reduces to 3.3 percent from 3.4 percent which was projected in the interim Budget. The answer is that the denominator, i.e., nominal Gross Domestic Product (GDP) has been inflated by 0.5 percent as the growth has been taken to be 12 percent instead of 7 percent. This marginal increase helps to reduce the fiscal deficit ratio.
The Economic Survey has spoken of real GDP growth of 7 percent in FY20 which means that inflation has to be around 5 percent. This is significant because it would be above the monetary policy committee (MPC) limit and therefore, the question is are we really looking at higher inflation and no more rate cuts if the Budget has to measure up?
Does the Budget actually say something on growth, consumption, investment? Tax rates have not really been changed and there are some peripheral taxes that have increased for the very rich while indirect tax rates including those on petrol and diesel have been increased. The Budget speech had spoken of what all has been given in the interim Budget and not made any concession here. Therefore, there is nothing specific for households here. There is an incentive on tax rebate on interest paid on home loans within the affordable housing category which is definitely an incentive to spend on housing. A similar concession has been made on interest on loans for electric vehicles which could increase consumption.
Again for investment, there is nothing specific as the government capex would still be in the Rs 3.4 lakh crore range which is around Rs 24,000 crore above the revised figures for FY19. Nothing significant is coming from the budget and it is back to the private sector filling in the gap. While the government has worked on easing the processes of doing business it should be realised that other things like capacity utilisation and the non-performing asset (NPA) issues have to fall in place before new investment comes in. Hence the Budget speech and Economic Survey have spoken of pushing up such expenditure but admittedly it would take time to work out.
How about growth? Here there are no direct steps to push growth forward which has to work slowly though there is an assumption of 12 percent growth in nominal GDP. In fact, such a number is required since if the tax revenue has to increase by 11 percent, there has to be rapid growth in GDP too. In incremental terms, the highest contribution has to come from the corporate sector where incremental tax revenue would be Rs 95,000 crore. Such buoyancy will mean renewed performance from companies.
An interesting facet of the Budget is that it has presented figures of FY19 (revised) as against the more recent numbers put out by the controller of accounts for the full year. This is important because the accounts numbers (which may be revised) had actually shown a lower size of the Budget of nearly Rs 1.5 lakh crore–instead of Rs 24.57 lakh crore, it was Rs 23.11 lakh crore. If these numbers hold, then the required growth rate in tax receipts would be 25.1 percent which is really a tall order. This may be one of the reasons why the government has not really tinkered too much with the expenditures.
Will the budgetary targets be met? Given the system of accounting that is followed where the cash-based structure is pursued, the fiscal deficit will always be attained as the government can roll over expenses, especially subsidies. When it was oil subsidy, the oil marketing companies (OMCs) would bear the delay in payments for a month, while in case of food subsidy the Food Corporation of India (FCI) has been borrowing from banks.
Therefore, one must not read too much into the numbers which are largely static as compared to the interim Budget. The policy stance, which is probably more important, is firm and positive and one should wait to see how they are rolled out during the year.
(The writer is chief economist, CARE Ratings)
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