The Budget fell short of expectation that there would be a bold step taken to provide a stimulus. Instead, the Finance Minister chose to work within the confines of the normal budgetary growth numbers to deliver an impact on spending. This will work, albeit gradually. The fiscal deficit ratio at 3.5 per cent for financial year 2020-21 (FY21) is higher than the 3 per cent target under Fiscal Responsibility and Budget Management (FRBM), but lower than that for FY20, which was 3.8 per cent. It was expected that the government could have raised capex by an additional 0.5 per cent of gross domestic product (GDP), i.e Rs 1.1 lakh crore to Rs 1.2 lakh crore to hasten the process of investment and create backward linkages with the rest of the economy.
It is not surprising that the market has not given thumbs-up to the proposals. While there would be some correction on Monday, the initial reaction definitely has been one of disappointment as there are no big-bang steps taken.
There are several assumptions made in terms of increasing spending power on the taxation front. While tax rates have been lowered for individuals the exemptions have been done away with, this could have an impact on savings as some of the exemptions were premised on diverting income to savings. Given that savings have been coming down in the economy, this is a rather an odd step taken. In fact, the pension funds benefits were brought in to ensure that a social security schemes were built up by individuals. This tends to get blunted in case people choose the new regime.
While the dividend distribution tax (DDT) has been a burden for companies, the doing away with the same and imposing the tax on the receiver of the benefit could lead to payment of a higher tax rate when combined with the new income tax slabs. Hence, the higher spending from the consumer side may not materialize that easily. Here, it must be pointed out that the spending power resides in the middle and higher income categories and higher taxation at these levels can come in the way of discretionary consumption.
At the macro level, the GDP growth of 10 per cent has been assumed, which was expected, but raises some skepticism as the targeted total receipts has been assumed to be around 12 per cent. It does look like that the expenditure numbers were fixed based on the motivation of the government and the revenue numbers drawn accordingly. Tax revenue collections have been sluggish in FY20 and with just about a similar growth rate in nominal GDP will pose a challenge in the coming year, too.
The Budget has also assumed a fairly stiff disinvestment target, which includes stake paring in Life Insurance Corporation (LIC) and stake sale in IDBI Bank. Given the rather subdued performance in FY20, it would be a challenge to meet such a target in the coming year.
So, what can be said about this budget? The fiscal target seems to be reasonable at 3.5 per cent but dependent heavily on how GDP progresses. Consumption has not exactly received a major thrust and is left to the household. Savings may get impacted at the margin. The boost to agriculture and infra is commendable, but would provide support to the economy and not really drive the same. Private investment may not see anything very positive in the budget and would bide its time before stepping. The government will have to continue to play the role of the engine to investment as the higher capex projected indicates.
Madan Sabnavis is chief economist at CARE Ratings. Views are personal