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EDITORIAL OF FEBRUARY 3


No fireworks: On Nirmala Sitharaman’s second budget


Whether the Budget flies or falls flat will depend on its ability to fuel growth

 

Nirmala Sitharaman’s second Budget is not a spend-and-stimulate exercise despite the fact that it has overrun the 3.3% target on fiscal deficit by as much as 0.5 percentage point. Nor is it a feel-good budget even accounting for the new tax regime for personal income tax with lower rates. It reflects the difficult circumstances under which it has been drawn up: falling tax revenues, rising borrowings and the need to rein in spending. It will certainly disappoint those who were expecting a big bang stimulus in terms of increased public spending or additional boost for investment. There were calls in the run-up to the Budget for the Finance Minister to relax the fiscal deficit target so that she could spend to revitalise the economy. In the event, as things turned out, Ms. Sitharaman did oblige them on the deficit front but that was more to compensate for the less-than-expected growth in revenues and not for extra spending. She has taken cover under a clause in the Fiscal Responsibility and Budget Management Act that gives her leeway to breach the set target.
 

That said, the Budget has been built on the assumption of a nominal GDP growth rate of 10% in 2020-21, which does appear optimistic given the state of the economy now. The nominal growth rate for fiscal 2019-20 as per government estimates is 7.5%. The recovery from here has to be sharp to justify next year’s projection. The gross tax revenue growth projection of 11.99% also appears very optimistic especially because it has been built on the premise of a 11.54% rise in corporate tax collections. Given the slowdown in profit growth and the lower corporate tax rate now, it is debatable if this projection can be met. And then, there is the huge ₹2,10,000 crore revenue assumed under disinvestment proceeds. This is based on the successful culmination of the disinvestment process in Air India and Bharat Petroleum, both of which have been set in motion, and on the planned disinvestment of equity in the Life Insurance Corporation of India (LIC) through an IPO. In addition to this, the government has also budgeted for receipts from the telecom players — of ₹1,33,027 crore — which, apart from the regular licence fees and spectrum charges, also includes the arrears that they would now have to pay consequent to the Supreme Court verdict that went against them. Just to put the importance of these two non-tax revenue items in perspective, they together account for over 11% of total receipts budgeted for the next fiscal. On the expenditure side, the Minister has extended a tight fist with allocations for major social sector schemes being maintained at about the same level as the budgeted estimates of 2019-20. In the case of MGNREGA, the allocation of ₹61,500 crore is lower than the revised estimate of ₹71,002 crore in 2019-20, though it is marginally better than the budgeted estimate of ₹60,000 crore last year. The spending on most heads of social sector schemes in 2019-20 has been much lower than the budgeted levels, including in the much spoken about PM KISAN scheme where the government spent only ₹54,370 crore compared to an outlay of ₹75,000 crore. The projected outlay of ₹75,000 crore under this head in the coming year shines only because of the lower spending in 2019-20. In fact, this can be said for most schemes such as the PM Gram Sadak Yojana, Ayushman Bharat and BharatNet where this year’s outlay appears higher only because of the much lower spending in 2019-20 compared to what was budgeted for. The compression in spending is a reflection of the extent of revenue shortfall this fiscal.
A highlight of the Budget is the proposal for a new scheme of taxation on personal IT where assessees can pay lower tax rates if they agree to forego all exemptions. Though this has attracted maximum attention, the fact is that to most taxpayers, it may not be as attractive as it appears. It may benefit those who do not claim deductions on housing loan repayments and who do not pay large insurance premium. Most of the popular exemptions and deductions like housing loan repayments, house rent allowance, leave travel concession and the concessions under Section 80C such as on life insurance premium, public provident fund contribution and under Section 80D on medical insurance premium will not be available to those who opt for the new scheme. The lower tax rates they will enjoy will be negated by the absence of these sizeable deductions for those who are already claiming them. If the taxpayers feel they are disappointed, it is understandable.
But savers and investors have reason to be happy as the insurance cover on bank deposits has been increased to ₹5 lakh from ₹1 lakh now. This will give them a measure of security in these uncertain times when bank frauds and defaults are becoming more frequent. But savers who are also investors have reason to complain as they will now be liable to pay tax on dividend income. The regressive dividend distribution tax has been abolished and with this the reforms on the corporate tax front have taken another big step forward. The other noteworthy proposal is the disinvestment in LIC where the government proposes to sell a part of its stake, unspecified as yet, through an IPO. That this is not going to be easy to put through is evident as unions have already raised the banner of revolt. The government has also adjusted import duties on a laundry list of items ranging from walnuts and toys to catalytic converters and fans. Some amount of thought seems to have gone into this as this list is largely made up of products where India has the manufacturing capability but has been a victim of cheap imports, sometimes riding on advantages from free trade agreements. In sum, there is nothing spectacular about this Budget which rides on optimistic growth estimates. Whether it flies or falls flat depends on how growth pans out in the economy in the next four quarters.