Nirmala Sitharaman's Budget 2020: Balancing act or leap of faith?

FM fights shrinking fiscal space by increasing non-tax revenue, freezing growth in subsidies

Finance Minister Nirmala Sitharaman delivered the longest Budget speech in history on Saturday, clocking in at two hours and 37 minutes. In the course of the speech, the FM sought to restore confidence in the Budgetary process by restructuring the fiscal consolidation path while staying within the confines of the Fiscal Responsibility and Budget Management Act. 

Accordingly, the fiscal deficit for the ongoing fiscal year, 2019-20, was modified to 3.8 per cent of GDP; next year’s fiscal deficit target was set at 3.5 per cent. Sitharaman achieved this feat in spite of constrained tax revenue, a larger giveaway to the states, and tax cuts for the middle class. The government also continued its commitment to capital expenditure by raising it by 18 per cent. 

The deficit slippage has been confined to only 0.5 percentage points in both FY20 and FY21 as against the previously announced fiscal consolidation path. In FY20, expenditure was compressed, and dividends from the public sector and the Reserve Bank of India came in handy. For FY21, Sitharaman expects to raise an unprecedented Rs 2.1 trillion from disinvestment, including a sale of some of the government stake in the Life Insurance Corporation of India through an initial public offer. 

 

 

In response to wide criticism of opaque off-Budget borrowing, the FM included a statement of extra-Budgetary resources. When these borrowings are included — especially by the Food Corporation of India for the food subsidy from the National Small Savings Fund — the actual fiscal deficit would go up to 4.5 per cent of GDP in 2019-20 and to 4.36 per cent in 2020-21.

The FM sought to assuage middle-class worries by insisting that wealth creators would not be subject to harassment through “tax terrorism”. She promised a “taxpayer’s charter” would be legislated, and announced an opportunity for taxpayers to settle outstanding disputes with the government by paying only the tax in dispute, without interest or penalty. Other changes addressed to the middle class included an increase in deposit insurance for bank accounts to Rs 5 lakh per depositor. 

A major reorganisation of personal income tax was announced, providing an option of lower rates for those who do not wish to take advantage of various exemptions. Income between Rs 5 lakh and Rs 7.5 lakh would then be subject to a rate of 10 per cent; between Rs 7.5 lakh and Rs 10 lakh at 15 per cent; and so on till Rs 15 lakh. This would alter the decision-making, especially for younger Indians, when it comes to investment in tax-saving schemes. 

Markets responded negatively to the Budget, with the Sensex closing at 39,735.53, down 987.96 (2.43 per cent) and the Nifty at 11,661.85, down 300.25 points (2.51 per cent).

In spite of the FM conceding a long-standing demand to remove the requirement that companies pay dividend distribution tax. Market participants suggested this reflected both concerns about market liquidity in the context of a large disinvestment programme, and a general disbelief that the Budget did enough to stimulate demand or undertake structural reform. 

Sitharaman continued the government’s recent turn towards protectionism by announcing a slew of measures that further raised tariff walls. 

Anti-dumping and safeguard measures against import surges are to be strengthened. Furniture, household goods and appliances, and inputs into electronics, all saw higher tariffs, in some cases doubled from 10 per cent to 20 per cent. Mobile phones assembled in India will become more expensive following tariff hikes in several components, such as screens and fingerprint readers. 

The Budget also announced some measures for the financial sector. Retail investors will soon be able to invest in G-Secs through an exchange traded fund. Some government securities will be “opened fully” to non-resident investors, reducing the drag of government borrowing on domestic savings and hopefully speed up the inclusion of Indian debt in global indices, catalysing the flow of global finance into India. Legal support for credit default swaps — and thus a deeper corporate bond market — has been promised. 

 

The remaining government holding in IDBI Bank is also to be sold. MSMEs, which have borne the brunt of the slowdown, received less in the Budget than they would have hoped. Other than the protectionist measures, the FM also promised that MSMEs with a turnover of up to Rs 5 crore would not be subject to automatic audits. Entrepreneurs were also promised that banks would provide subordinate debt that would in turn be guaranteed by the government. 

The FM promised major allocations for many existing schemes in the future, including for the Jal Jeevan drinking water scheme, which she reiterated would be provided Rs 3.6 trillion in all; but the actual Budgetary allocation was only Rs 11,500 crore. 

Expenditure compression was a feature of the Budget; subsidies for food, fertilisers and petroleum will remain at Rs 2.3 trillion in FY21. Defence expenditure has not risen as much as real GDP, being increased only two per cent. Sharp expenditure compression has aided the FM in containing fiscal slippage — but has also given rise to concern about the possibility of a continuing slowdown in demand.