The Disinvestment Clock Starts Right Now for the Modi Government

Sitharaman's budget came with no big-bang reforms, but the FY20(RE) and FY21(BE) numbers looked largely veracious, even if they came at the cost of a limited expansionary fiscal stimulus.

The current economic slowdown in the Indian economy called for an expansionary fiscal policy to spur consumption and reinvigorate investment activity by utilising the “escape clause” available as per the N.K Singh Committee (FRBM) report.

Despite using the trigger mechanism and deviating in its fiscal deficit target by 0.5% for FY20 and FY21, numbers in Budget 2020-21 focuses more on the adherence to the fiscal glide path with only limited expansionary stimulus. This was largely on account of using assumption about India becoming the fifth largest economy and using “averages” to compare higher growth rates in 2014-19 vis-à-vis 1950s and 1980s without really acknowledging the current deceleration.

An almost 3 hour marathon speech did have its fair share of action plans on agriculture and infrastructure, newly announced personal income tax charter and prospective schemes in different areas, but the big push really did not come.

Barring adherence to the fiscal deficit target of 3.5% for FY’21 with a deviation within limits, there were certain interesting points which the Budget had to offer.

Disinvestment comes to the rescue

The top-line of the Government is constrained and they acknowledged the same by firstly revising the net tax revenue in FY20(RE) by almost Rs 1.5 lakh crore and further budgeting a growth of 8.7%, lower than the assumed nominal GDP growth of 10%. In addition, the disinvestment proceeds was also revised lower. The total expenditure was budgeted to grow by almost 13% which manifests that the Government will continue to do the heavy-lifting to revive the economy. Despite this, how did the Government manage to increase the fiscal deficit only by 3.8% for FY20 (from the budgeted 3.5%)?

This time around, the government resorted to a partial stake sale via an Initial Public Offer (IPO) in one of its favourite “lender of last resort”, LIC India, to garner significant portion of the disinvestment proceeds. Though this partial stake sale in LIC is better than using public’s money as a last minute resort to invest in other PSUs, this would mean government would have to expedite their disinvestment program from the start of the fiscal. Without this additional Rs 90,000 crs on disinvestment proceeds from LIC and IDBI, the fiscal deficit target would have shot up to 3.9% of GDP in FY21.

More details on the LIC stake sale along with additional revenue expenditure from this to spur rural consumption would have helped.

Two mysteries in case of personal income tax

In case of the newly announced optional new tax regime, the illustration given by the Finance Minister highlighting a savings of Rs 78,000/- for an individual on opting for a new income tax regime would have garnered a lot of cheer for individuals. However, this calculation was based on an entire premise that an individual does not claim any deduction. The FM added that the individual would still benefit even after availing Rs 1.5 lakh as deduction. However, for an investor, tax savings is only one of the key parameters looked at while investing and thus the math of arriving at the tax savings amount could have been better by considering combinations of higher deduction levels. The new-tax regime to some extent discourages savings by individuals amidst a time when savings rate in India is declining. In addition, multiple tax slabs add to the pain points in the new regime.

The second mystery which is difficult to decipher is the growth in the revised estimate of 18.5% in case of gross income tax, which during April-December, 2019 period shows a growth of only 5.1%. It is not clear whether the “Vivaad se vishwas scheme” introduced to reduce litigations and upfront pay the disputed tax amount would help.

Dividend Distribution Tax

The move back to the classical system of Dividend distribution tax, with dividend income tax in the hands of the recipient is a positive move in terms of removing part of the cascading effects and tax and bringing things in line with international standards. It would be interesting to see here whether the gains to the companies from DDT saving would be utilised for private investment or would be in the form of higher dividends to the losers of this announcements (i.e dividend earning investor)

Not revenue, but boost to capex this time

The biggest positive in this Budget was to see a robust growth in capital expenditure to the tune of 18% in FY’21. However on digging further, one can find out that almost 80% of the additional allocation of Rs 63,000 crore towards capital expenditure has been only in three ministries: Telecommunication, Finance and Road Transport which means other key ministries namely Railways, Housing and Urban affairs and Commerce and Industry missed out.

On the other hand, revenue expenditure which accounts for almost 87% of the total budget size recorded higher allocation to the tune to the 12% from a year ago. However, the centrally sponsored schemes and central sector schemes, which in total account for almost 1/3rd of the revenue expenditure only registered higher budget allocation of 7.3% and 8.4% respectively. Centrally sponsored schemes like MGNREGA which could have spurred rural consumption and driven employment recorded a decline of 13% in FY21.

Allocation in the cash transfer to the farmer (PM-Kisan) remained at the same level of Rs 75,000 crore as seen in FY20. This too could have been beneficial to spur rural consumption.  Allocation in National Health Mission contracted by -0.5% while National Education Mission witnessed a meagre growth of 4%. Both the agriculture based schemes (Green revolution and Pradhan Mantri Krishi Bima Yojana) had significantly higher allocations. Another ministry which required higher allocation was the micro, small and medium enterprises to address their concerns, received an higher allocation of only Rs 500 crore in FY’21 from a higher ago. Given the additional proceeds available from likely higher disinvestment, an expansionary spending in these heads could have been beneficial.

To conclude and as expected, Budget 2021 did not have big bang reforms and was largely woven around the three prominent themes of Aspirational India, Economic Development and Caring Society. Barring a couple of numbers, the FY20(RE) and FY21(BE) numbers looked largely veracious but this came at the cost of a limited expansionary fiscal stimulus. It would be interesting to see how the new personal income tax regime plays out with a lot of CAs having to handle multiple income tax slabs in both regimes amidst their current GST complications. On a lighter note, with the government focusing heavily on technology in different fields, hopefully sometime in future we will “Faceless” Budget to avoid listening to an almost three hour lecture.

Sushant Hede is an Associate Economist at CARE Rating. Views expressed here are personal.