The first budget of the Narendra Modi government 2.0 is very high on political rhetoric around empowering the poorest in ‘New India’, but does not have a clear road map of how a fully-funded welfare state will be sustained without a robust revival in growth, based on the twin engines of investment and consumption firing simultaneously.
Finance minister Nirmala Sitharaman has made all the right noises, reflecting Modi’s pet themes of last mile welfare delivery, but there was no cohesive strategy on how growth will revive amidst a softening global economy and India’s own manufacturing and agriculture output trending downward for some time.
The budgeted revenue math is so shaky that for the first time the finance ministry has chosen to factor in receipts of Rs 90,000 crore from the RBI’s balance sheet as “surpluses”. That this is being done even before the Bimal Jalan committee has made public its recommendations shows there is a desperation to raise funds to meet the massive physical and social infrastructure needs which may help boost employment.
Another potentially risky strategy being envisaged by the government for the first time is to raise sovereign debt via dollar denominated bonds to fund the needs of infrastructure. The finance minister’s justification for partially dollar-ising India’s fiscal deficit is that the country’s total external borrowings are below the safe limit of 5% of GDP. Normally, sovereign borrowing by nations is for big amounts, in the range of $5 billion to $10 billion. Governments in the past have considered the idea but eventually dropped it because the dollar debt has to be repaid in hard currency and carries immense exchange risk.
In any case, raising such money has other imponderables as it would create a benchmark for India vis a vis other countries like China in the global markets.
Nevertheless, Sitharaman is embarking on this strategy possibly to create long-term funding avenues for infrastructure. The biggest structural crisis faced by the economy today is the near collapse of the banking system, which cannot find long tenure infrastructure projects of 10-15 years anymore. Already about Rs 4 lakh crore of bank funded infrastructure projects have nearly turned into NPAs.
This is the backdrop in which Sitharaman has announced a special committee to go into how long-term debt could be raised to fund infrastructure projects worth Rs 100 lakh crore over the next five years. India’s sustained revival of growth and employment largely hinges on this and at present the picture is rather fuzzy as to how this committee will go about its task.
So funding growth, and consequently welfare, remains an area of grave uncertainty. The budget assumes a massive 25% growth in total revenue receipts (2019-20) which are pegged at Rs 19,62,000 crore. How can such high revenue growth be possible in a slowing economy?
While tax receipts are not expected to show much buoyancy, given that GDP growth in 2019-20 may barely touch 6.5%, the attempt is to raise money through non-tax revenues such as PSU divestment, government asset monetisation and, of course, digging into RBI’s reserves. Clearly, these are one-time measures and can’t be repeated every year.
Another paradox in the budget speech is that it lays a lot of emphasis on capital expenditure to fund growth in infrastructure but the government has actually brought down the capital expenditure in nominal terms from Rs 9.2 lakh crore in 2018-19 to Rs 8.7 lakh crore for the current fiscal. This seems to suggest that much of the growth in borrowings by the Centre and the PSUs on behalf of the Centre, are going towards revenue expenditure.
This is most visible in the agriculture sector where the big increase is almost entirely dominated by PM Kisan income transfer of Rs 87,000 crore and the actual increase in public investment is negligible in real terms. Can income transfer alone substitute for the need to remedy structural issues facing agriculture?
Overall, the budget makes a lot of pious statements but there are too many gaps when you try to look for coherence in the big picture.