Budget 2020: Micro gamble for macro gain

The Union budget for 2020-21 offered an estimated Rs 40,000 crore of tax concessions to individual taxpayers, following up its September decision to offer Rs 1.45 lakh crore of the same to companies, resorting to a straightforward (and obvious) budgetary stimulus to revive the economy. Cooperatives have also been given the option to move to a low-exemption, low-tax regime.

It also increased government spending, the second way to deliver a budgetary stimulus, albeit by a modest amount, but with a sharp focus on capital expenditure (or asset creation).

The 2020-21 budget comes against the backdrop of the slowest rate of growth in 10 years. To be sure, the historical comparison improved after Friday’s revision in the 2018-19 GDP figures pushed this year’s growth to 5.7% from 5%, yet, the biggest expectation from the budget was that it would give a boost to aggregate demand in the economy.

Finance minister Nirmala Sitharaman, visibly tiring towards the end of a two-hour-40-minute-long speech, said in an interview that she “wanted to touch each and every section of society and I wanted to give out the message that this government is a responsible one”.

She described the budget as a “Jan Jan Ka Budget”, or a budget for everyone, as did Prime Minister Narendra Modi.

In a tweet shortly after the budget speech, Modi tweeted: “JanJanKaBudget places immense faith in India’s youth. That is why there is emphasis on MSME sector, skill development, boosting exports and creating next generation infrastructure. The start up and real estate sector have got significant benefits.”

Sitharaman said the three themes of the budget were: “Aspirational India; economic development; and a caring society.”

However, the Opposition was quick to pan the budget. “The main issues confronting this country today are unemployment and the situation as far as the economy is concerned. I did not see any concrete idea… The government’s approach is visible in this budget. It was hollow,” Congress leader Rahul Gandhi told reporters after the presentation in Parliament.

Between the out-of-budget, September 2019 move on corporate tax and the 2020-21 budget, the government has given Rs 1.85 lakh worth of tax concessions to the businesses and individuals. This includes the reduction in corporate tax rates (Rs 1.45 lakh crore of revenue forgone); the reduction in income tax rates announced in the budget (Rs 40 thousand crore of revenue forgone); in addition, there’s the scrapping of Dividend Distribution Tax (an estimated Rs 25,000 crore benefit for companies, although there will be an increase in income tax on account of the fact that dividends will simply be added on to taxable income in the hands of recipients as and where applicable).

There are other, smaller measures as well, sharply focused on specific kinds of companies or sectors.

The revenue implications of these moves are clear, with budgeted gross tax revenue of the Centre expected to come down from Rs 24.61 lakh crore in 2019-20 to Rs 24.32 lakh crore in 2020-21. To be sure, the 2020-21 budget estimates (BE) are higher than the revised estimates (RE) of Rs 21.63 lakh crore for 2019-20. These revenue projections are based on the assumption of a 13% growth in GST collections.

On the expenditure front, there is less of a stimulus. Total budgetary expenditure in 2020-21 will grow by 12.7% between 2019-20 (RE) and 2020-21 (BE). This is less than the 16.6% growth between 2018-19 actual figures and 2019-20 RE figures. Injecting rural demand was seen as one of the key challenges for this budget. Total spending of ministry of agriculture and ministry of rural development — this includes spending on MGNREGS and PM-KISAN — is expected to grow by 13.4% between 2019-20 (RE) and 2020-21 (BE). However, the growth is considerably smaller (2.6%) if ones looks at the growth between 2019-20 (BE) and 2020-21 (BE) figures. A slowdown in the economy and the resultant hit in revenue collections has forced the government to cut down on what it would have spent on the rural economy had the overall economic situation been better.

“The appropriate way to look at the budget is to see how the government has honoured its past commitments. There has been a trend where budgetary allocations have not been honoured for some time, this makes one suspect whether a similar thing will happen next year too,” said Himanshu, associate professor of economics at the Jawaharlal Nehru University.

To be sure, the government has ensured that capital spending, which matters more for future growth, has not suffered because of the economic slowdown. Total capital spending in 2019-20 (RE) is Rs 3.48 lakh crore, more than the 2019-20 (BE) figure of Rs 3.38 lakh crore, and is expected to go up to Rs 4.12 lakh crore in 2020-21 (BE). This bodes well for future growth. Social sector spending such as in health, education, social justice has also been largely kept intact between 2019-20 (BE) and 2020-21 (RE) estimates. The overall spending pattern of the government suggests that it believes that the worst is over for the informal and rural economy – the biggest proof of this is a sharp reduction in MGNREGS spending between 2019-20 (RE) and 2020-21 (BE) – and the tax stimulus which has been provided will give a boost to economic activity in the next fiscal. The government also seems to be hoping that some of the stimulus will also come from a revival in investment. Sovereign wealth funds have been promised tax incentives in lieu of investments in infrastructure. And PPPs (public private partnerships) have been envisaged in several areas.

“PPP projects in agri-warehousing, medical colleges attached to district hospitals, development of cities, and railways, will boost confidence towards organised and sustainable business model, which will attract private and foreign investment. Commitment towards infusing equity of Rs 22,000 crores into IIFCL and subsidiary of NIIF will help create long term debt funding towards capital expenditure for creating new infrastructure. Fresh investment in capex for infrastructure sector will not only create new employment and leave more disposal income in hands of common man but create a pipeline to repay the capital or debt,” Samir Kanabar, tax partner, EY India, said.

Whether or not these assumptions will hold is a question that cannot be answered immediately, analysts said. The first big test will be when GDP figures for the third quarter of the current fiscal are released towards the end of this month. If the economy does not show a significant recovery, it could further worsen sentiment.

Experts said one question worth looking at is the revenue projections and underlying tax buoyancy assumptions which have been made in the budget. Tax buoyancy is growth in tax revenue per unit change in GDP. This number is expected to be 1.2 for 2020-21. This number was 1.1, 0.8 and 0.5 for 2017-18, 2018-19 and 2019-20 (RE) figures. This means that the government is banking of the significant widening of the tax net compared to what it has been in the recent past. Given the fact that the budget assumes a nominal GDP growth of 10%, the lowest since 2008-09, it is clear that the revenue projections are relying more on ensuring better tax compliance than reaping the tailwinds of economic growth. The other big area the government is banking on is disinvestment proceeds, which are expected to fetch Rs 2.1 lakh crore in 2020-21. A strategic disinvestment of the Life Insurance Corporation is likely to be the biggest contributor to this target.

“The budget overall was good in intent in which all important and necessary sectors were touched upon and a growth trajectory was chalked out. However, we feel the spending on each sector could have been doubled as compared to what has been allotted. Overall, I feel that the finance minister did not take the bull by the horns,” Niranjan Hiranandani, president of the Associated Chambers of Commerce and Industry of India (ASSOCHAM) said.

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