A Tough Bal­anc­ing Act

De­spite an over­whelm­ing cho­rus to in­crease spend­ing, Budget 2019 chose to be fis­cally pru­dent

India Today - - COVER STORY - —Sh­wweta Punj

Budget 2019 was drafted amid high ex­pec­ta­tions and se­vere con­straints. And fi­nance min­is­ter Nir­mala Sithara­man de­cided to stick to the straight and nar­row path of fis­cal pru­dence. The ad­vo­cates of growth-above-all would have been dis­ap­pointed, but Sithara­man sounded char­ac­ter­is­ti­cally res­o­lute at the india to­day Budget round ta­ble. Ex­plain­ing her rea­sons, she sim­ply said: “I have to maintain fis­cal dis­ci­pline... It is the law”.

Fi­nance sec­re­tary S.C. Garg had this to add: “[About] 80-85 per cent of India’s sav­ings are de­posited in govern­ment banks. That doesn’t leave much for pri­vate banks [leav­ing them with less to loan out]. In­ter­est rates re­main high, which dis­cour­ages pri­vate sec­tor in­vest­ment. A stim­u­lus would take more sav­ings away from the pri­vate sec­tor.” Some econ­o­mists agree with Garg. India’s to­tal bor­row­ings ac­count for 8-9 per cent of GDP, as do its to­tal house­hold sav­ings. And this is a hur­dle to low­er­ing in­ter­est rates.

The budget pegs the fis­cal deficit target for this year at 3.3 per cent of GDP, which is be­low the 3.4 per cent set in the Fe­bru­ary in­terim budget. The Rs 70,000 crore set aside to re­cap­i­talise pub­lic sec­tor banks will ease their bal­ance-sheet woes and hope­fully spur lend­ing. And govern­ment data sug­gests that the worst might be over for India’s bank­ing sec­tor—ac­cord­ing to the budget, gross NPAs of PSU banks de­creased from 11.5 per cent to 10.1 per cent be­tween March and De­cem­ber 2018.

The budget also makes a pitch for for­eign cap­i­tal. And tries to tap some new sources for scarce

rev­enue. Most of the in­crease in tax rev­enue will come from the higher surcharge and cess levied on petrol and diesel. An­other Rs 30,000 crore is bud­geted to be raised from in­creased du­ties and sur­charges on the in­come tax side. Ef­fec­tive tax rates for the high-in­come group have gone up sig­nif­i­cantly—to 38 and 42 per cent, re­spec­tively, for in­comes above Rs 2 crore and Rs 5 crore.

All that said, there is a prob­lem in the rev­enue and ex­pen­di­ture pro­jec­tions in the budget. As Rathin Roy, di­rec­tor of the National In­sti­tute of Pub­lic Fi­nance and Pol­icy pointed out, there is a dis­crep­ancy be­tween the rev­enue es­ti­mates for 2018-19 in the Eco­nomic Sur­vey and the budget, with the sur­vey peg­ging them a full per­cent­age point be­low the budget. This amounts to a gap of Rs 1.7 lakh crore in ab­so­lute terms. Ques­tions have been raised, in­clud­ing by some ex­perts in these pages, and the govern­ment has yet to ad­dress the dis­crep­ancy.

The big­gest com­plaint about the budget is that it does lit­tle to stim­u­late growth di­rectly. What it counts on as a growth driver in the medium term is sup­port for in­fra­struc­ture and ru­ral spend­ing and the fo­cus on small in­dus­try. The sig­nalling, then, is con­ser­va­tive: in­creased im­port du­ties ev­i­dence a pro­tec­tion­ist stance, and the surcharge on the su­per-rich is likely to scare for­eign portfolio in­vestors. “Sen­ti­ment af­fects in­vest­ment. The budget in­cludes var­i­ous good poli­cies but then you keep the top 0.7 per cent of in­dus­try out of it. This is what hurts sen­ti­ment,” laments a for­mer mem­ber of the Prime Min­is­ter’s Eco­nomic Ad­vi­sory Coun­cil, re­fer­ring to the de­ci­sion to re­strict lower cor­po­rate tax rates to com­pa­nies with a turnover of less than Rs 400 crore.

If the Modi govern­ment has a roadmap to its $5 tril­lion dream, the sign­posts are not vis­i­ble in this budget. As Rakesh Mo­han, for­mer deputy gover­nor of the Re­serve Bank of India, warned in a Brook­ings India paper, ti­tled Mov­ing India to a New Growth Tra­jec­tory: ‘The po­lit­i­cal es­tab­lish­ment, the bu­reau­cracy, the pub­lic com­men­tariat and aca­demics are all focused on how to make dis­tri­bu­tion more efficient. There is limited dis­cus­sion on how to en­hance growth to the lev­els pro­jected... Un­less pol­icy at­ten­tion comes back to growth, there is lit­tle chance for India to achieve up­per-mid­dle in­come sta­tus in the fore­see­able fu­ture.’

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