As we roll around to another budget, the mood is dark. Although there’s been some chatter around the December data suggesting signs of the first “green shoots”, it’s clear that 2020 is going to be a tough year on many expected lines – fiscal slippage, unemployment, poor manufacturing. But there are also new challenges; a surge in inflation, an unknown geopolitical situation and extremely poor tax collections.
A good barometer of expectations this time, is the lack of it. There’s no usual blitz of what the budget will or will not bring in the pink papers, no top ten demands from the FM and hardly any time has been spent by equity research houses around a budget primer.
So, realistically, what can the government and the finance minister do in this budget?
Two big sized problems face finance minister Sitharaman at this point. A challenging fiscal situation that has worsened on the back of sluggish tax revenues on the one hand and a weak economy, on the other.
The number one attack point should be growth. The government could increase spending to hot-wire growth – higher tax benefits for housing in order to rekindle housing demand and supply and upping the spending on rural infrastructure would be great initiatives. Remember, housing constitutes around 6.5% of GDP and fiscal stimulus to housing and infrastructure can boost both aggregate demand and supply.
What the country needs sorely though, is a booster shot of credibility. And that will only come with some plain speak. About the situation as it stands, about what the authentic figures are, for unemployment, sector wise stress and bad loans. Setting in place a credible plan towards fiscal management and more realistic forecasts for revenues and expenditure will be a good start. For example, net tax collection growth will likely be around 8.3% vs the budgeted figure of 25.3% budgeted. In fact, the April to November growth in net tax collection has been 2.6% YoY, a decade-low growth.
The budget is also a great opportunity to chop and prune the labyrinth of social welfare programs and replace them same with a simpler income program, especially for the rural sector.
What would be a strong signal that the government means business would be to bite the bullet on disinvestment. A move to genuinely privatise PSUs from the more marquee stables like banks, defence, energy would not only be a huge positive in the eyes of rating companies but would also go a long way in addressing the cash strap the government finds itself in as it heads into this budget session.
However, here’s a more “real world” set up for February 1. This year’s fiscal deficit will be more of a two steps back situation, where the finance minister will probably let the fiscal deficit slip beyond 3.5% in both FY2020 and FY2021. Expenditure for the last quarter of FY20 will likely be cut given how poor the run on tax revenues has been. A few crowd-pleasers like a personal income tax cut may be tabled as stimulus measures. This one is a gamble – not only is the taxpaying community a minuscule slice of India’s population, there’s also a chance that given the current environment and alarming inflation levels, a tax cut may actually see households choosing to save rather than spend.
The one outlier through this all has been the stock market. Everyone has a theory for why it’s been rallying – the ability to discount the now for the future, the lack of investment alternatives or simply, just a dozen stocks pulling the frontline indices along, while all else struggles. For the equity universe, the FM may extend the definition of ‘Long Term’ from one year to two years, and reduce tax rates to zero beyond two years holding. The move will certainly boost market sentiment.
But let’s look closer. The Sensex and Nifty are a small and elite club of the big balance sheet, cash-rich firms. Polar opposites to the real state of the economy.
As of 2018, India was 145th in terms of nominal GDP per capita. Sliced another way, the per capita income of India is about five times lower than world’s average around of $11,673.
The IMF recently marked down India’s growth targets observing that domestic demand has slowed more sharply than expected amid stress in the nonbank financial sector and a decline in credit growth. India’s growth is projected to improve to a sub-par 5.8% in 2020 and 6.5% in 2021 – a far cry from where expectations were set at last year. The world and the nation are watching. But it’s unlikely this budget will be our moment in the sun.