HYDERABAD: Budgets are all about balancing income and expenditure. Simple, really. But for Finance Minister Nirmala Sitharaman, preparing the decade's first budget (also her second) is anything but ordinary.
As the economic slump tears into every fiber of the country's being, the nation's mood has gone from hope to disappointment over falling growth, jobs and wages.
Worryingly, all key budget elements -- revenue, debt and expenditure -- are creaking, yet Sitharaman is somehow expected to perform arithmetic alchemy to electrify the economy.
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During these extraordinary times, the country needs cash and lots of it. But with investments at a 17-year-low, the spending baton is passed on to the government, which itself is staring at a revenue shortfall of historic proportions.
Of course, the government can borrow, but given the unmistakable breach in FY20 fiscal deficit target, further debt may trigger rating agencies to grab their pitchforks.
But as Keynes said, the boom, not the slump, is the right time for austerity at the treasury. In other words, Sitharaman should call for considerable courage and pursue fiscal consolidation via fiscal expansion, which is to widen deficit by a few decimal points. For FY20, the deficit may shoot above 3.7 per cent, and gross borrowings may be upwards Rs 7.6 lakh crore in FY21, but the meatier part for markets will be the medium-term fiscal policy framework and how the FM plans to salami slice deficit in next three years.
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"We've had a demand slowdown and there's no reason to continue with fiscal consolidation. Instead, we must increase the deficit to give the economy a breather via countercyclical fiscal policy," said Karan Bhasin, a Delhi-based policy researcher.
The question then is how to effectively utilize borrowed funds. Being prudent doesn't mean cutting taxes alone during downturns, but aligning spending towards productive assets even if it means topping up the balance sheet with higher deficits.
"The only option is to spend on areas including healthcare, which creates jobs. Government allocations should be higher in the forthcoming budget," said Anil K Sood, of Ideas Sans Ideology. The government wants healthcare expenditure to be 2.5 per cent of GDP by 2025 from the current 1 per cent, but more needs to be done. "For instance, programmes like Ayushman Bharat are severely underfunded, while the health insurance programmes need farther reach," Sood reasoned.
Besides, the budget should undertake realistic measures to double agricultural income for farmers, and channel much-needed credit to MSMEs given that humble attempts such as Mudra loans remained ineffective.
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The spotlight, if there's one, should be on job creation and it's expected that the FM will likely use the budget to fast forward infrastructure projects, another major job creator. The ambitious Rs 102 lakh crore outlay for infrastructure over the next five years includes Rs 19.5 lakh crore for FY21. Of this, the government's share comprises 39 per cent or roughly Rs 7.4 lakh crore, which Sitharaman may front-load to get the economy going.
While the focus on rural and agrarian distress remains, financial sector snatches unequivocal attention. Suggested solutions range from a US-style troubled-assets resolution plan to handle stressed NBFCs assets, to an often-repeated bad bank proposal, but the government is unlikely to yield.
However, it's expected to rollout relief measures for NBFCs and real estate sector, particularly, housing that may see efforts to clear unsold inventory, a one-time GST exemption for first-time buyers, and incentives to take up distressed projects. Income transfers for senior citizens, or further tax deductions to neutralize the anticipated low-interest rates, are also expected.
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If there's one thing the FM must do, it's implementing direct tax reforms. There's a clamour for personal income tax cuts and the logic is pretty straight forward. The recent corporate tax cuts are a one-trick pony as benefits come in the long-run and to boost demand now, personal tax cuts are crucial.
But the government neither has the elbow room nor fully agrees with that logic. It believes investments will drive growth and consumption, which currently accounts for 60 per cent of the GDP, should only be a force multiplier. Moreover, having foregone a princely sum of Rs 1.45 lakh crore in lieu of corporate taxes already, the appetite for personal tax cuts appears remote. An across-the-board overhaul of personal taxes may erode Rs 50,000-85,000 crore revenue -- a sum that makes Sitharaman cringe.
"Tax rationalization is important to drive compliance considering our high tax rates. Implementation of direct tax code also removes LTCG in equities, since we already have STT. It also implies rationalization of dividends distribution tax," Bhasin explained.
As for indirect taxes, the FM could chuck cess here and there to raise revenue, though GST rates may be left untouched. But all eyes will be on GST collections, as Sitharaman was explicit in her previous budget that GST revenue will start its star performance in FY21.
FY20 disinvestment proceeds will likely miss the target by a mile, but policy watchers want a realistic target next fiscal. The grim reality is, even in FY21 tax collections are unlikely to be grand, so experts suggest credible government projections.
Importantly, the budget will give clarity on economic recovery and India's nominal growth in FY21. A $5 trillion economy needs 13-14 per cent nominal GDP growth as against the current 7.5 per cent.
Given the slowdown blues, fireworks are expected in Sitharaman's second budget. Regardless of whether it'll be a please-all budget, the FM, cognizant of her civic duty, should do her best to lift the national spirit and set the ball rolling through reforms.
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