The evolving economic situation is making Union Finance Minister Nirmala Sitharaman’s job increasingly difficult, as she prepares to present the Union Budget in less than a month from now. A senior finance ministry official has been quoted as saying that the government may not be able to complete the strategic sale of Bharat Petroleum Corporation (BPCL), Container Corporation of India, and Air India in the current fiscal year. As the government was expected to raise over Rs 56,000 crore by selling its stake in BPCL, a significant shortfall on account of disinvestment will put additional pressure on government finances.
But disinvestment is not the only problem. Tax revenues are also likely to fall short significantly. The fiscal deficit in the first eight months of 2019-20 stood at 115 per cent of the full-year target. A sharp correction in the remaining months of the year will be difficult because of muted tax inflow. The collection of advance corporation tax, for example, fell by 5.2 per cent in the December quarter. While collection from goods and services tax was above the Rs 1-trillion mark in December, it fell short of the target of Rs 1.1 trillion, set for the last four months of the fiscal year. Therefore, to contain the fiscal deficit under 3.3 per cent of gross domestic product, the government will have to significantly cut expenditure or postpone payments. Most analysts expect the government to overshoot the deficit target, partly because of slower than projected economic growth. Therefore, in the given situation, all stakeholders would broadly look for at least three big things in the upcoming Budget.
First, the government will be expected to present a genuine assessment of the economy. Painting an unrealistic picture at this stage will affect the government’s credibility and reduce the possibility of hard decisions to revive economic growth. Second, the Budget will make it clear how far the government intends to support the economy through fiscal means. It should carefully assess its options. A sharp slowdown should not be seen as a licence to go for an unbridled expansion of the fiscal deficit. The government cannot be seen as uncaring about its finances, even in the short run. Further, the Budget will also bring clarity on the revenue position in 2018-19 because the revised estimates in the July Budget did not present the true picture. It’s time the government recognised the fiscal problems and presented its finances transparently. Postponing expenditure or shifting liabilities to public sector entities cannot go on forever.
Third, the government will be expected to present a credible fiscal consolidation road map. This, to a large extent, will depend on a proper assessment of the economy. For instance, the National Infrastructure Pipeline assumes an annual nominal growth rate of 12.2 per cent between 2020-21 and 2024-25. Assuming inflation at 4 per cent — the midpoint of the Reserve Bank of India’s target range — this means the government expects the Indian economy to grow at over 8 per cent in real terms. Such assumptions for fiscal projection will unnerve the markets and make the Budget unrealistic and less credible. The government lost a chance in July to set things right; it should not lose another.