Can the Budget rekindle growth?

Aarati Krishnan | Updated on February 02, 2020

There are no booster shots for the economy in the Budget, only small infusions for targeted beneficiaries

Despite the many signs that the Finance Minister was caught between a rock and a hard place in making her fiscal ends meet while framing Budget 2020-21, expectations were running high for her to deliver a magic pill to perk up a flagging economy. The CSO’s dismal first advance estimates for FY20, which pegged the real GDP growth at 5 per cent and nominal growth at 7.5 per cent fuelled these expectations.

From an initial reading of the Budget though, it appears that the NDA regime has chosen to forego big steroid shots to electrify the economy, in favour of small glucose infusions for select beneficiaries.

No big consumption boost

Private Final Consumption Expenditure (PFCE), making up 57 per cent of the GDP, is the most critical growth engine. The slump in PFCE from 8 per cent growth in FY19 to an estimated 5.7 per cent in FY20 played a major role in moderating growth.

Demand cutbacks, whether in two-wheelers, cars or FMCGs have been most noticeable in rural India, which has been battered by a combination of poor monsoons both in 2017 and 2018, falling farm product prices, and dwindling non-farm employment opportunities. On the crop pricing front, glimmers of hope have recently popped up with rising food price inflation both at the wholesale and retail levels. Higher Budget allocations for food subsidies and a bump-up in the PM-KISAN transfers may have helped this trend along by directly bolstering farm income.

But the food subsidy outlay in the Budget is modest, at ₹1.15 lakh crore for FY21 — just 6 per cent higher than the revised estimates for FY20. A good portion of these outlays will go to clear past dues. PM-KISAN, the direct income transfer scheme, has bagged ₹75,000 crore, against spends of ₹54,370 crore in FY20. The actual spending of these allocations will depend on whether the Centre manages to get more beneficiaries to enrol in the scheme.

Overall, agriculture and allied activities have bagged ₹1.54 lakh crore for FY21, a good 25 per cent increase over the revised estimates for FY20. But given that outsized allocations have done little in the past to improve farm incomes, a lot will hinge on recent food inflation trends continuing.

Employment prospects in rural India now depend a lot more on non-farm job opportunities than on farm fortunes. Here, flagship schemes such as MGNREGA, PM Krishi Sinchai, Awas Yojana and PM Gram Sadak Yojana hold the key. On MGNREGA, which spent ₹71,002 crore in FY20 as per revised estimates, outlays for FY21 have actually been slashed to ₹61,500 crore. In its place, PM Krishi Sinchai, Awas Yojana and Sadak Yojana have together bagged ₹58,127 crore, a 28 per cent hike over last year. But as this aggregate boost of ₹11,000-odd crore will accrue only indirectly to rural consumers, it is moot point if it will be a big demand stimulant.

On urban consumption, hopes were pinned on the Budget handing out significant cuts in personal income tax rates for folks in the ₹5 lakh-plus slabs, who drive big-ticket purchases of vehicles and white goods. The Budget has obliged by slashing tax rates in these slabs but thrown in a googly by insisting that taxpayers give up all their other exemptions to enjoy the lower rates.

This is certainly a reformist move, in line with the suggestions of the new Direct Tax Code, but as a stimulus measure, it falls short. The FM estimates revenue foregone from these tax cuts at ₹40,000 crore; small in the context of India’s total PFCE number of ₹123 lakh crore.

The Centre’s focus on consolidating public sector banks and its decision not to extend a direct lifeline to NBFCs are prudent from a fiscal perspective. But this also means that it expects the stalling credit flow from banks and NBFCs to sort itself out, which may take time.

Muted revenue spending

Government Final Consumption Expenditure, accounting for about 11 per cent of GDP, has punched above its weight in the last four years, growing at about twice the rate of the real GDP.

The Government’s rising salary and pension bills, from the implementation of the Seventh Pay Commission, provided an invisible consumption boost expanding at 20 per cent a year from FY16 to FY18. But with this effect wearing off, wage/pension bill increases are expected to moderate to 5-6 per cent this year. As per Budget estimates, the Government’s revenue expenditure excluding interest payments is expected to expand by 12.1 per cent to ₹19.2 lakh crore in FY21 over FY20 RE, compared to a 3 per cent decline in FY20. But meeting this target will require meeting revenue projections.

Given that tax revenues are unlikely to grow at a high rate, a lot hinges on the Centre meeting its ambitious disinvestment target of ₹2.1 lakh crore for FY21. The target is not unattainable if the Centre manages to list LIC and push ahead with strategic sales of attractive PSUs such as BPCL.

Doing its bit on investments

After PFCE, it is Gross Capital Formation, or the investment leg of the economy, that chips in with the biggest share of GDP, at about 32 per cent. Here, it is India’s private sector that usually accounts for the lion’s share at about 50 per cent of the incremental capex. Indian households make a contribution of about 37 per cent, while the Government accounts for about 13 per cent.

The Budget suggests that the Government will be doing its bit to keep the investment cycle going, by stepping up its own capital spending by about 14 per cent in FY21, pegging its capital investments at ₹6.18 lakh crore. That’s 20 per cent of its total expenditure, higher than in previous years. Big bump-ups in Budget allocations to IT and telecom (from ₹16,000 crore in RE FY20 to ₹59,349 crore in BE FY21) and transportation (₹1.58 lakh crore to ₹1.69 lakh crore), taken with promises of a ₹20,000 crore equity contribution to the National Infrastructure Pipeline are positives.

But having handed out generous tax cuts to India Inc a few months before, the Centre has been quite frugal with its handouts to it in this Budget. Left to their own devices, India Inc may wait for the current de-leveraging cycle to play out and for demand to make a robust comeback, before dusting off new projects.

Overall, Budget 2020 reflects the Centre’s view that it need not do all the heavy lifting to get the economy back on track. It is up to the other actors to raise their game.

Published on February 01, 2020

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