The much-awaited Budget of the first year of NDA-II could indicate the prospective course of action for the next 5 years as the government has a strong and clear mandate, stresses Sushant Hede, Associate Economist, CARE Ratings. Views expressed here are personal.
The first inning of the incumbent government had a mixture of repair and reform strategy with key reforms like Goods and Services Tax (GST) and Insolvency and Bankruptcy Code (IBC) showing a glimpse of positives amidst teething challenges. The NDA Government, in its second innings, has a clear lead on the political front, which would ensure continuity of policies but the trailing behind in the performance of key macroeconomic indicators is the challenge, which needs immediate resolution. With the government pursuing a path of fiscal consolidation and continuing to be at the edge of it, a fiscal stimulus to boost a slowdown in the economy remains restrained. Thus, only a marginal flexibility in the path of fiscal consolidation for the short run push and highlighting the need to tackle key challenges grappling the economy for better medium and long term growth could be the theme of the Budget.
With revenues from GST still remaining below budgeted and higher expenditure on various welfare schemes restraining the fiscal space, the Budget 2019 could estimate fiscal deficit (as a % of GDP) to be marginally higher at 3.5% of GDP in FY20. As this is the first budget of the second inning, a few steps in the direction of improvement in the overall economic prospects looks likely.
Firstly, the agriculture sector continues to face challenges with adverse terms of trade. Despite the announcement of MSP, the prices of agriculture produce have been low, not reaping benefits for the farmers. Moving towards an income support scheme, the interim Budget announced PM-Kisan scheme for small and marginal farmers, which has now been extended to all farmers. Along with the income support scheme, policies to focus on agriculture marketing reforms, agriculture exports and irrigation to reinvigorate the sector could be expected. However, the focus on these three objectives should not be limited to short term adjustment in allocations but have a long term policy objective with a seed of the same sown in this Budget.
Secondly, the continuing slowdown in consumption not only translates into subdued growth in investment activity but also lowers the indirect tax collection of the government leaving less space for expenditure. High unemployment, meagre pick-up in wages and higher GST rates on key items of consumption like automobiles and consumer durables have weighed on consumption growth. Therefore, addressing the issue of unemployment and clues of moving towards a more revenue neutral GST rate as against the current 5-tier GST structure is imperative in the Budget.
Thirdly, there would certainly be a continuing thrust on spending on roads, highway development and construction. With the private sector investment being limited, higher capital expenditure by the government (excluding the off-budget borrowings) infrastructure-based sectors is expected. In addition to these sectors which are also labour intensive, a boost to the textile sector with export driven policies would not only aid in employment generation but also provide higher disposable income for improving consumption. Further policy implementation of the government’s flagship program of ‘Make in India’ will also bode well in revival of the private sector manufacturing activities. Along with these sectors, higher allocation should be towards healthcare and education sector.
Moving on to the fourth pointer of direct taxation, it is unlikely to see any changes in the tax slabs for individuals and corporates. A roadmap of reducing the corporate tax rate to 25% for all corporates also looks unlikely and would see likely postponement until the mobilisation of indirect tax collection is more streamlined.
Last is the financial sector which at the moment is marred in news of defaults. Though the NPA challenge has improved to some extent in the banking system, the issues of the housing finance companies (HFCs) and non-banking finance companies are concerns. As this problem is non-systemic and concentrated among a few entities, it will be interesting to see the stance in the budget for the HFCs and NBFCs. However, a roadmap to reducing the government stake in public sector banks to below majority looks possible in this Budget.
This Budget should accept the current slowdown in the domestic economy and address the structural challenges of the economy for long term growth.