THE GROWTH QUESTION
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
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.
“IT’S HARD TO SEE THIS AS A
BUDGET... THE NUMBERS, BASED MAINLY ON THE FEB. INTERIM BUDGET, HIDE A MASSIVE REVENUE HOLE” —Abhijit Sen
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