Six ex­perts weigh in on Fi­nance Min­is­ter Nir­mala Sithara­man’s maiden budget and as­sess if enough has been done to put a flag­ging econ­omy back on track

India Today - - COVER STORY -

Q. How would you cat­e­gorise this budget? Is it a growth budget? Will it stim­u­late the econ­omy? A.


The ac­cent is on fis­cal con­sol­i­da­tion, with the budget re­sist­ing the temp­ta­tion to spend ag­gres­sively to bol­ster growth. That said, one needs to read be­tween the lines of growth-prop­ping mea­sures. First, the fis­cal re­straint will make way for a growth-sup­port­ive mon­e­tary pol­icy. Fis­cal pol­icy is the key sig­nal to the Re­serve Bank of India (RBI) under the in­fla­tion tar­get­ing regime and we ex­pect it to cut the repo rate by 25 ba­sis points in its pol­icy meet in Au­gust. Sec­ond, bank re­cap­i­tal­i­sa­tion of Rs 70,000 crore and sup­port to non-bank­ing fi­nan­cial com­pa­nies (NBFCs) will en­hance their lend­ing ca­pac­ity, cru­cial to stim­u­late growth. The par­tial credit guar­an­tee from the govern­ment for se­cu­ri­ti­sa­tion will fa­cil­i­tate pur­chase of NBFC loans by banks and re­duce stress in the sec­tor. With these mea­sures, we ex­pect GDP growth to start looking up by only the sec­ond half of this fis­cal. With good rains and soft oil prices, it could cross the 7 per cent mark. If not, we’re looking at sub-7 per cent growth again, even with bud­getary ef­forts.


I would say it’s growth-ori­ented with a medium-term fo­cus. Budget 2019 is fo­cus­ing more on the pro­cesses (ease of do­ing busi­ness). Con­sid­er­ing its aim to achieve $5 tril­lion in five years, it needs to ad­dress many struc­tural is­sues. The budget sug­gests that the growth in the coun­try needs to be backed by more pri­vate in­vest­ments while the govern­ment fo­cuses on de­vel­op­men­tal is­sues (ease of liv­ing). The pro­pos­als on in­creas­ing in­vest­ments in in­fra­struc­ture could stim­u­late the econ­omy. The govern­ment’s scal­ing up of some of the ru­ral de­vel­op­ment schemes should stim­u­late demand in the econ­omy.


The Cen­tre’s fis­cal deficit target for 2019-20—ad­justed for as­set sales—is al­most the same as last year. So there is no ad­di­tional fis­cal im­pulse for growth di­rectly from the budget, which is a re­lief since with the to­tal pub­lic sec­tor bor­row­ing, at 8-9 per cent of GDP, con­sum­ing vir­tu­ally all house­hold fi­nan­cial sav­ings, there was no fis­cal space for ex­pan­sion. How­ever, the budget will help growth through two chan­nels. First, fis­cal dis­ci­pline will bring down in­ter­est rates (al­ready

re­flected in fall­ing bond yields) and help the RBI’s mon­e­tary trans­mis­sion. Sec­ond, some part of the pub­lic sec­tor bank re­cap­i­tal­i­sa­tion funds will con­sti­tute ‘growth cap­i­tal’ re­leas­ing the sup­ply con­straint of loan­able funds.


It ad­dressed sol­vency, gov­er­nance and liq­uid­ity is­sues to boost in­vestors’ con­fi­dence as well as con­sump­tion. Putting money in peo­ple’s hands through per­sonal in­come tax cuts and re­duc­tion in cor­po­rate in­come tax to 25 per cent, in­fra­struc­ture spend­ing di­rec­tions, in­sti­tu­tional mea­sures to im­prove liq­uid­ity, all sig­nify growth stim­u­lus.


I have some dif­fi­culty in cat­e­goris­ing this as a budget at all. There was no usual state­ment of re­ceipts or ex­pen­di­tures for ei­ther 2018-19 or as pro­posed for 2019-20. Of course, the budget papers do have the re­quired num­bers but are mainly based on the Fe­bru­ary in­terim budget and hide a mas­sive rev­enue hole. Ta­ble 2.5 of the Sta­tis­ti­cal Ap­pen­dix in Volume 2 of the Eco­nomic Sur­vey re­veals that ac­tual net tax rev­enues in 2018-19 are now pro­vi­sion­ally es­ti­mated at Rs 13.16 lakh crore as against the re­vised es­ti­mate of Rs 14.84 lakh crore shown in both the in­terim and present budget.

This huge tax short­fall—one per cent of GDP—should nor­mally have re­quired se­ri­ous re­work­ing of the in­terim budget es­ti­mates, but this doesn’t seem to have been done. Al­though pro­jected tax rev­enues for 2019-20 have been pruned marginally com­pared to the in­terim budget (from Rs 17.05 lakh crore to Rs 16.49 lakh crore), these are pre­sented as ‘con­ser­va­tive’, i.e. only 11 per cent higher than 2018-19 RE as against 12 per cent pro­jected GDP growth. In fact, these tax es­ti­mates are ‘highly op­ti­mistic’, be­ing 25 per cent higher than the 2018-19 pro­vi­sional ac­tual and over dou­ble GDP growth. The en­tire budget needs to be taken with a pinch of salt. The speech it­self was strong in pre­sent­ing achieve­ments of the past five years and did out­line a vi­sion for fu­ture growth, based around the $5 tril­lion target, but had lit­tle on getting out of our cur­rent hole.


I feel this is a pro­gres­sive budget. It has been pre­sented against the back­ground of slowdown in eco­nomic growth, agrar­ian dis­tress and prob­lems in the Mi­cro, Small and Medium En­ter­prises (MSMEs) and fi­nan­cial sec­tors. The budget re­flects these con­cerns. The Eco­nomic Sur­vey ex­pects the real GDP to grow at 7 per cent in 2019-20. This is pos­si­ble when cap­i­tal in­vest­ment as well as the mar­ginal ef­fi­ciency of cap­i­tal in var­i­ous sec­tors im­proves. Presently, the MSME sec­tor is in deep trou­ble. Agrar­ian dis­tress con­tin­ues and the fi­nan­cial sec­tor has not over­come the NPA fever. The budget does not pro­vide a cure for the chronic ill­ness of India’s econ­omy and stim­u­late growth. But there is a broad di­rec­tion in which in­vest­ment and growth will move.



Q.In terms of a sig­nalling effect, what’s the message to in­dus­try and the MSME sec­tor? Does it do enough for cor­po­rate in­vest­ment?


The move to al­low NBFC par­tic­i­pa­tion on the Trade Re­ceiv­able Dis­count­ing Sys­tem (TReDs) is wel­come, given the chal­lenges around working cap­i­tal fund­ing faced by MSMEs. This will open up a new lend­ing av­enue for NBFCs, which ac­counted for over 10 per cent of the MSME lend­ing in fis­cal 2019. The al­lo­ca­tion of Rs 350 crore in fis­cal 2020 to fund 2 per cent in­ter­est sub­ven­tion for all Goods and Ser­vices Tax (GST)-reg­is­tered MSMEs on fresh loans would ben­e­fit a fifth of them. How­ever, this would sup­port only 10 per cent of in­cre­men­tal SME lend­ing.

We don’t see a swift re­vival in pri­vate cor­po­rate in­vest­ments. De­spite im­prov­ing util­i­sa­tion, ca­pac­ity overhang per­sists in some seg­ments. Sure, a re­form-ori­ented budget and ab­sence of po­lit­i­cal and pol­icy un­cer­tainty is pos­i­tive for pri­vate cor­po­rate in­vest­ment re­vival, but the growth slowdown has been sharper than ex­pected, post­pon­ing a de­ci­sive lift in pri­vate in­vest­ment this fis­cal. Also, the ex­pected re­turn on in­vest­ment mat­ters more than in­ter­est rates for pri­vate in­vest­ment de­ci­sions, which will take time to im­prove. On the sunny side, the fo­cus on reviving the man­u­fac­tur­ing sec­tor by at­tract­ing for­eign in­vest­ment in sun­rise ar­eas should pay off over the medium run.


As the Eco­nomic Sur­vey pointed out, there is a need for a vir­tu­ous cy­cle of in­vest­ments to stir the econ­omy. In­creas­ing the lim­its for FDI in some cru­cial sec­tors, ef­forts to re­duce cost of cap­i­tal and in­creas­ing de­pen­dency on for­eign sav­ings should help the do­mes­tic cor­po­rate sec­tor plan for ex­pan­sion. Re­duc­tion of cor­po­rate tax to most com­pa­nies should also en­cour­age the in­dus­try. For the MSME sec­tor, the sur­vey pro­vides a grand vi­sion. How­ever, the budget doesn’t re­ally ad­dress this ex­cept for

ABHIJIT SEN For­mer mem­ber, Plan­ning Com­mis­sion

N.R. BHANUMURTH­Y Pro­fes­sor, National In­sti­tute of Pub­lic Fi­nance and Pol­icy (NIPFP)

VIKRAM KIRLOSKAR Pres­i­dent, Con­fed­er­a­tion of In­dian In­dus­try (CII)

D.K. JOSHI Chief Econ­o­mist, CRISIL

SA­JJID CHI­NOY Chief India Econ­o­mist, J.P. Mor­gan

TAJAMUL HAQUE Agri­cul­tural Econ­o­mist

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