Budget must focus on long-term growth sustainability

The upcoming Budget poses the government the challenge of a tightrope walk of balancing the dual goals of offering a fiscal boost to the weak growth momentum without losing focus on long-term fiscal discipline commitment.

Managing the fiscal arithmetic remains a serious challenge. The Finance Minister may opt to invoke the escape clause in the FRBM Act (that allows up to 50 basis point slippage to the budgeted deficit under exceptional circumstances) and may settle for a 2019-20 fiscal deficit of 3.6-3.8 per cent of GDP, as against the budgeted target of 3.3 per cent of GDP.

While that may not trigger a major negative surprise, fiscal deficit exceeding 3.8 per cent of GDP might cause the debt market to turn materially worried not only about the potential immediate additional government borrowing, but also about the longer term commitment to the FRBM roadmap.

At the same time, it may not necessarily be a direct confidence booster for near-term growth as the slippage will likely be a result of the government’s revenue shortfall and a sharp drop in nominal GDP, rather than due to larger fiscal spending. In fact, the government might have to curtail expenditure below the budgeted level in order to contain fiscal deficit within 3.8 per cent of GDP during 2019-20.

The fiscal roadmap projections for the coming years also face a number of headwinds. First, given the weak growth momentum, GST and corporate tax collections will likely record only a moderate growth. Expecting a sharp rise in disinvestments will not be realistic as well in the absence of any special mechanism (example, strategic disinvestments).

Also, dividends from the RBI and other PSUs may take time to cross the 2019-20 level, given the larger transfer this year following the Jalan Committee recommendations. Potential cushions such as buoyant small savings collections are relatively light-weight. Accordingly, despite popular expectation of reduction in personal income tax, any relief on that front might be small, if at all, in my view.

Longer term growth

The narrow fiscal space will likely prompt the government to focus more on better targeting of its spending — potentially focussing on rural areas, affordable housing, support for MSMEs, and infrastructure. The government is likely to continue to push towards better social security programmes including healthcare, rural infrastructure such as electrification and irrigation, stronger focus on NREGA, and skill enhancement to name a few.

The current slump in growth in India owes heavily to the headwinds faced by the financial sector. A plan towards mitigating the same, especially for NBFCs on an immediate basis, should help boosting confidence. Ensuring a robust credit culture remains another key area to focus for the long term health of the financial sector and its ability to support the economy.

Separately, the government’s big bang cut in corporate tax rates a few months back can potentially be a strong positive over time, but is unlikely to act as a material near term boost for growth.

Admittedly, the Finance Minister does not have an obvious magic wand to deliver a quick cure-all for the economy. However, the government is expected to lay down a credible medium-term roadmap towards combating the ongoing slowdown and boosting business and consumer confidence.

One option for the Finance Minister is to recalibrate the FRBM roadmap, allowing larger fiscal deficit in the near term. However, irrespective of whether she adopts that option, it is of critical importance that the government presents a credible path for revenues and focus on composition and quality of fiscal spending rather than merely looking at the headline deficit numbers.

The writer is Chief Economist & Head Research, Bandhan Bank

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