For an economy that is undeniably in slowdown mode, it does come as a surprise that the first Budget of the Modi 2.0 government has eschewed any sort of pump priming, instead preferring to leave the job of stepping up investment to the private sector. The template for a growth process driven by monetary accommodation and fiscal prudence was spelt out rather clearly in the Economic Survey, tabled in Parliament on Thursday. If one were to compare this growth slide with the post-GFC period, it is clear that the Centre has consciously chosen not to go down the path laid out by the then finance minister Pranab Mukherjee. It is believed, and not without reason, that the fiscal stimulus then administered led to both deficit and inflation going out of gear. Expenditures were poorly managed, with corruption in delivery processes no doubt playing a role in the double digit inflation rates of the UPA-2 years. Yet, from there, it seems a tad excessive to altogether shut out the fiscal option to get the economy moving, particularly when there are better technological processes in place to ensure quality spending. An increase of ₹3.3 lakh crore in the projected expenditure of the Centre in 2019-20 over the revised estimates of 2018-19 is insignificant when seen against the ₹3.15 lakh crore increase in 2018-19 over the actuals of 2017-18 — given inflation and nominal GDP growth of 12 per cent projected in 2019-20. The fiscal squeeze is underscored in relation to capital expenditure: it has been slashed to ₹8.7 lakh crore in 2019-20 from ₹9.2 lakh crore in the revised estimates for 2018-19, with Railways bearing the brunt. It would appear that uncertain revenue collections on both the direct taxes and GST fronts have prompted this fiscal conservatism. While the tax revenue estimates for 2019-20 are conservative in relation to the interim Budget, they seem ambitious when seen against the revisions made by the Controller General of Accounts for 2018-19. The Centre has budgeted a disinvestment mop-up of ₹1.06 lakh crore to plug this gap.
Indeed, the push to privatisation marks one of the boldest aspects of this Budget, highlighting the quiet confidence of a government that is looking at the medium term to execute structural reforms. In a significant departure, government holding would include shares held by public sector entities as well. Air India has been squarely placed on the bloc, and others shall follow suit. The 51 per cent threshold too may be relooked at. This marks a break, after more than a decade of pussyfooting over disinvestment. While NDA 1 botched it up, leading to an adverse political fallout, this government is expected to learn from earlier mistakes.
The Budget is rich in micro details, having proposed several positive steps to galvanise the capital and debt markets, the latter aimed at pushing infrastructure finance. The Centre will back by one-time guarantee the purchase of high-rated pooled assets of NBFCs by PSBs, a move that could ease the liquidity crisis in the sector and help MSMEs conduct their business. Banks will be recapitalised to the extent of ₹70,000 crore to boost credit. With a view to expanding financing options, mandatory public float level has been raised from 25 per cent to 35 per cent. This is a far-sighted move, aimed at raising retail participation. Possibly responding to criticism post-DeMo, that the taxman had become an obstreperous presence in the business ecosystem, the Finance Minister announced steps to make procedures easier, including making PAN and Aadhaar inter-operable. Start-ups too have much to cheer about, as do women in the SHG space. However, it seems that some proposals have not been thought through. The prospect of a tax benefit from a sale of a house being ploughed into a start-up could give rise to malpractices.
However, the big picture that emerges from both the Survey and the Budget is that big ticket public spending in economic sectors will be restricted, possibly to affordable housing, road building and PM-Kisan. Worryingly, the role of education, public health and skills-building in powering a ‘$5 trillion economy’ has not received much attention. The transformative potential of Swachh Bharat in recycling waste has received welcome emphasis. But how ‘nal se jal’ for all by 2024 will become a reality is not very clear. The Modi government has brought about game-changing reforms by way of the bankruptcy code, GST and direct benefit transfers. In the rural space, income transfers indicate a paradigm shift. This vision needs to be carried forward, with private players – creating a stock market niche for social activities is an innovative step. Finally, it is not clear whether private sector will pick up the tab. In the US and EU, negative interest rates didn’t spur investment. Triggers to investment have remained one of those mysteries in economics.