Finance minister Piyush Goyal’s budget, the sixth and last one of the current government, was expected to be crafted with an eye on the forthcoming general election. Those expectations have been met. The highlight, from a political standpoint, was the introduction of a new direct income support for 120 million small farm households. They are to get Rs 6,000 a year. Another section getting relief is the long suffering middle class tax payer, who will collectively have Rs 18,500 crore more to spend on account of a full tax rebate on income up to Rs 5 lakh. Goyal’s budget however does have a downside. It’s troubling when an interim budget commits to a large expenditure thereby squeezing fiscal space for the next government.
The economic assumptions undergirding the budget are a robust growth in tax revenue and confidence that economic growth has stabilised at the current level. Consequently, the fiscal deficit in 2019-20 is expected to remain at last year’s level of 3.4% of GDP. After amendments to the fiscal targeting law last year, the aim now is to reduce the fiscal deficit to 3% in 2020-21. One key takeaway from this budget and the preceding ones of NDA is that the jobs crisis remains unaddressed. It will remain the most serious economic and social challenge in future.
In tackling agrarian distress, NDA deserves credit for the method chosen. A direct cash transfer of Rs 75,000 crore is the cleanest way to provide assistance to farmers. Not only is it administratively feasible, it will not induce market distortions. However, the larger question now is will any future government have the political courage to revisit fertiliser subsidies and support price for cereals as these are leading to distortions. The design of farmers’ income support is in contrast to a pension scheme for unorganised sector workers with a monthly income of up to Rs 15,000. It’s a moot point if such a scheme will make a meaningful difference as its implementation will be complex.
On the direct tax front, there are other good steps taken by Goyal. The increase in the threshold for tax deduction at source on interest income and also on house rent makes things simpler for beneficiaries. Other measures to encourage housing under Section 80-IBA and also Section 54 are timely. The direct tax proposals not only put more money in middle class pockets, they also provide an economic incentive for housing. These measures should boost private consumption and help the economy. This was reflected in the stock market indices which closed on a positive note. The giveaways on the direct tax front have not lowered government’s optimism with regard to targets for 2019-20. Over the last few years, buoyancy in direct taxes has been a noteworthy feature and a continuation of the trend is expected to result in gross tax revenue of Rs 25.52 lakh crore, an increase of 13.5%. This growth rate in tax collections is forecast to marginally outstrip the 13.3% growth in total expenditure to Rs 27.84 lakh crore.
Budgeting for expenditure also explains why the quality of fiscal consolidation leaves a lot to be desired. To illustrate, the contribution of resources from public sector enterprises in 2018-19 to complement government spending was increased sharply during the year. The revised estimate of Rs 6.44 lakh crore represents a 35% increase. A related challenge is that the extent of market borrowings, be it by railways or NHAI, to fund infrastructure is increasing. Of the total capital expenditure Rs 9.53 lakh crore in 2019-20, 65% of the investment will be sourced from internal and extra-budgetary resources of government entities. This calls for a sharper focus on governance as extra-budgetary resources are eventually the government’s liability. The bottom line? This budget evokes a positive mood as it boosts sentiments, but many challenges remain unaddressed.
DISCLAIMER : Views expressed above are the author’s own.
via Smart populism: NDA’s last budget takes positive steps which also boost it politically, but risks remain