Tightrope walk

New FM has multiple pressures to balance when drafting Budget

Now that the general election has been concluded, attention must turn to the Union Budget for 2019-20, which will be presented in early July. The interim Budget, presented in February, laid out certain estimates for the spending and revenue pattern over the year. But it is clear now that the situation has turned even more adverse. A slowdown in growth over the past three quarters is likely to impact revenue. The targets set in the interim Budget will definitely appear to be ambitious in this scenario. The interim Budget figures showed that corporate tax collections would be higher by 15 per cent in 2019-20 over the collections in 2018-19 and that personal income tax collections would increase by an even greater proportion — 34 per cent. The Central Board of Direct Taxes has already asked for a reduction of the target as growth is wavering. Goods and services tax collection, closely related to the health of the economy, is projected to increase by 31 per cent in the interim Budget for 2019-20 over actual collections in 2018-19. These numbers are almost impossible to achieve, which means the Budget will have to trim both revenue and expenditure to better reflect the deceleration of economic activity caused by slowing consumption trends.

The official data showed the government went in for an expenditure cut of Rs 1.45 trillion from the projections in the Revised Estimates of around Rs 24.5 trillion for FY19 to keep its fiscal deficit target at 3.4 per cent of gross domestic product. This means a double whammy — the bills overdue have to be paid in this fiscal year and the axe could fall on investment in the physical infrastructure as there will be little potential for the government to increase spending in order to revive growth. Besides, the fiscal consolidation path has been a major commitment from this government even if it has been modified once or twice in response to unexpected or populist spending. Any further deviations will only dent the government’s hard-earned reputation for fiscal prudence, which is a price that it should not be willing to pay. In addition, given that the growth slowdown is linked to a crisis in private investment, the government should avoid laxity on its fiscal deficit or growing its debt profile further. Enhanced crowding out of private investment is the last thing that is needed.  
 

It is also clear that there is little scope for such populist spending in the remainder of the year. The government has already felt it necessary to indulge in some extra expenditure, with an expansion of the farmer-centric PM-Kisan scheme, announced at the first meeting of the Union Cabinet after the elections. This expansion is to cost Rs 12,000 crore more in addition to the Rs 75,000 crore earlier planned. Thus, in spite of considerable temptation, the new finance minister will have to avoid big giveaways to various sections of the electorate. Few will envy Ms Sitharaman’s task. The best that can be done is a tight, fiscally prudent Budget with no splashy headlines or populist giveaways.