More sparks needed to light up the scene

KR Srivats New Delhi | Updated on January 22, 2020

But faltering revenues, tepid divestment receipts leave little headroom for big stimulus

A sagging economy coupled with limited wiggle room for the Government to engage in fiscal stimulus through increased spending or further tax cuts portends a painstaking task for Finance Minister Nirmala Sitharaman to lift the economic mood of the country as she sets out to present her second Budget on February 1.

Given that the $2.7-trillion Indian economy had faced a sharp slowdown in 2019, many economy watchers want the Finance Minister to further loosen the purse strings and not worry about the stretched fiscal deficit position — one can always put off the avowed declaration of fiscal consolidation to a later date, say beyond 2021-22. They want the Government to spend its way out of the problem of low demand in the economy and low private investments. However, the fiscal picture belies expectations of some Big Bang stimulus or the Finance Minister playing to the galleries on the growth push.

By even a conservative measure, the Centre is likely to peg the fiscal deficit for the current fiscal at 3.8 per cent of GDP, a slippage of 0.5 per cent in the deficit target. This is after accounting for the already implemented corporate tax rate cuts — a big booster dose for Corporate India — in last September and likely shortfall in gross tax revenues (1 per cent of GDP).

Driven by weak revenues, fiscal deficit in the first eight months of current fiscal stood 15 per cent above target. The fiscal deficit-overshoot is not out of sync with past trends. This is because, typically, the fiscal run rate worsens for three fourths of the year and then moderates in the final quarter as expenditure is scaled back and seasonal revenue flows kick in, according to Radhika Rao, Economist at Singapore headquartered DBS Bank.

The bottomline is that economists and corporate India will look upto the Finance Minister to ensure a cyclical recovery of the economy that will be sustained by a structural turnaround. The overarching themes that the common man would pray for is a cut in personal income tax — unlikely to be a big giveaway from the government this time too given that General Elections are not expected anytime soon — and rural demand push. One can expect some tinkering in the income tax slabs.

Reaffirm infra focus

The upcoming Budget is likely to reaffirm Government focus on infrastructure spending accompanied by some sectoral relief. With the Government already taking several growth-promoting measures to address sectoral woes in real estate, exports and MSMEs this fiscal, one cannot expect too much in terms of fiscal relief in the Budget.

Not only is the Government underperforming on the disinvestment — blame it on market conditions, the other nagging worry is that monthly target of GST collections (about ₹1.1-1.2 lakh crore) is routinely being underachieved for most months so far this fiscal.

With the stock market bench mark indices at an all-time, Sitharaman is unlikely to spoil the market mood, but might even spread some cheer with rationalisation of securities transaction tax and doing away with dividend distribution tax. The tax incidence on dividends could fall on the shareholders along with long-term capital gains tax changes.

“Markets will look for improved transparency in the budgetary announcements. Any slippage in fiscal deficit could result in a negative credit impulse in the near term but will need to be balanced with a credible consolidation plan further out,” Rao said.

With banking sector still weighed down by NPAs, there could be little Budget infused cheer except for a much talked about US-like Troubled Asset Relief Program(TARP) to strengthen the domestic financial sector. Insurance sector may get some good news in the form of hike in FDI limit to 74 per cent.

Scope for surprises

Sitharaman could well surprise the markets with some heavy lifting on the ‘non tax revenues’ side — brace up for some interim dividend from RBI, additional dividends from PSUs and spectrum or AGR related payments from telecom companies. Disinvestment receipts may see significant shortfall unless the Government does a HPCL-ONGC type deal this year too. Many economists see the Centre raising its disinvestment receipts this year to a maximum ₹60,000 crore on the back of a last quarter rush. This is against a budgeted ₹1.05 lakh crore.

To accommodate the revenue shortfall, the Centre has gone in for expenditure cut in the fourth quarter, slower disbursements under PM Kisan scheme, deferment in subsidy payments as part of efforts to rein in expenditure.

The markets will keenly watch the 2020-21 budgetary assumptions, particularly on revenues and nominal GDP growth. Here’s hoping that Sitharaman — unlike last time — makes a realistic projection of nominal GDP of 9-10 per cent, assuming higher deflators. Indications are also that the Budget will take the first steps in implementing the task force recommendations on Direct Taxes Code. Big Bang reforms in the Budget are unlikely, but there are expected to be measures definitely to perk up the economic mood. She is likely to play more like Sachin Tendulkar than Virat Kohli.

It’s a mixed bag
  • Fiscal deficit slippage likely in 2019-20
  • Shortfall seen in disinvestment receipts for FY19-20
  • No big stimulus expected to prop up economic growth
  • Sharp compression in expenditure, including subsidy payouts, to help manage fisc
  • Budget may set new fiscal consolidation roadmap
  • More realistic nominal GDP growth, revenue projection likely for 2020-21
  • Market expects a bailout programme like US’ TARP for strengthening the financial sector
  • FDI cheer likely for insurance sector
  • Non-tax revenues likely to get a boost from RBI interim dividend, telco AGR payouts
  • Announcements are expected on new Direct Taxes Code

Published on January 22, 2020

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