Can Budget steer a rudderless economy?

July 5, 2019 is likely to be an important date for the next five years, as new Finance Minister Nirmala Sitharaman presents the full Union Budget for FY 2020.

Coming at the backdrop of a much bigger mandate garnered by the Modi government, this Budget comes at a time when the nation faces multiple challenges amidst high expectations. The significance of this Budget is that it is coming at a time when there is a growth crisis looming large on the economy amidst a 45-year high unemployment and high farm distress. Sometimes one wonders whether the actions, misdeeds and missed opportunities of the last five years have actually taken India back to early 1990s and with a significant risk of not having a “Manmohanesque” expertise to wave the magic wand and turnaround a completely messed up economy.

Challenges confronting the Finance Minister and her team are manifold, but key among them are:

Growth pangs

Lower GDP growth in the fourth quarter of FY 2019 and the early indications of this continuing in the first quarter of FY 2020.

* The automobile sector recorded a 10-month consecutive de-growth in June 2019 and this is not expected to improve despite indications of a much dovish stance of the RBI.

* Core sector growth fell to 5.1 per cent in June 2019 despite upward revision of the May 19 growth percentages.

* Services sector contracted for the first time in more than a year in June while the composite index of factory and services declined for the first time in 13 months indicating much pain in store for the economy in the coming months.

* RBI Governor has accepted that the slowdown in the economy is for real.

Deficit worries

Fiscal deficit target is not likely to be maintained at the targeted 3.4 per cent of the GDP as 52 per cent of the budgeted fiscal deficit target has already been breached in the first two months. This clearly is on account of the revenue situation not being in line with projections. The reasons are:

* GST collections falling below the ₹1 trillion mark in June 2019, the first time in the last 4 months.

* GST collection was budgeted to grow at 31 per cent whereas the actual growth has been 10.05 per cent in April, 6 per cent in May and 4.5 per cent in June.

* Corporate tax revenue has been budgeted at 15 per cent higher than 2018-19, which could be much lower considering the pain in various sectors.

* Personal tax revenue targeted at 34 per cent growth is unlikely to be achieved despite higher tax base. Lower consumption indicates lower disposable cash with the end consumer.

Onus on non-tax revenue, disinvestment

* There is probability of high dependence on non-tax revenue and disinvestments at a time when unemployment rate is peaking month-on-month.

* Disinvestment is likely to face stiff resistance from trade unions due to the probability of displacement of staff to make the sale attractive to the buyer.

* High public debt to GDP already at 68.7 per cent of the GDP despite being lower than 69.6 per cent in FY 2016, indicating that in order to achieve the many promises that this government had made during the elections, this number is only expected to go higher.

Stress in financial sector

* The failure of shadow banking institutions and NBFCs amidst high liquidity concerns indicates more pain in store for the MSME sector

* The 31-per cent credit contraction of NBFCs will impact automobile, agriculture and MSMEs in an unprecedented manner

* Property related loans have reduced by 50-80 per cent, farm credit reduced by 55 per cent while education loans and housing loans fell by 43 per cent and 23 per cent respectively, indicating that the slowdown is for real (CRIF Highmark and Finance Industry Development Council).

* The support that NBFCs had provided to the banking sector in providing additional working capital, assisting consumption loans and penetration to low-banked areas is expected to be significantly muted due to early indications of high stress and low trust of banks in lending to NBFCs.

* This situation is also likely hurt banks’ efforts to lower NPAs than what it was during the last 2 years.

Farm sector distress

* Early indications of a much below normal monsoon endanger the much distressed agricultural sector further.

* Erratic monsoons have been more or less the norm in the last five years and this has increased significant water scarcity in high producing States like Maharashtra, Uttar Pradesh and Tamil Nadu.

* With El Nino effect not showing any signs of relenting, farmers are in for having a much bigger hole in their pockets and the doubling of farm income in five years being a distant dream for the government.

Unemployment is at its highest in 45 years and the government too has finally acknowledged it.

* Investment interest has been at its lowest in 14 years.

* Capital investments have depleted.

* New private sector projects fell by 62 per cent in December (CMIE capex) .

* New public sector projects dipped 41 per cent YOY, 14-year low (CMIE capex).

* This is clearly dampening the efforts at job creation.

Despite the grim situation facing the economy, the expectations from the Finance Minister are of high pragmatism focused on the following key elements:

* Announcement of stimulus for key segments like automobiles, MSME and agricultural sector.

* Focusing on better credit flow through easing of liquidity concerns to these segments on high priority basis.

* Prodding RBI to consider aggressive reduction in interest rates.

* Reconsider the imposition of LTCG on listed equities and capital market instruments while considering faster implementation of the Direct Tax Code recommendations.

* Incentive based approach to increase the tax base which otherwise could further push the country to Inspector Raj due to aggressive direct tax targets.

* Higher tax exemptions for the lower end of the tax base prompting them to spend more and save more which could improve capital formation seriously required for investments.

* Reduction in corporate tax to improve sentiments as well as increase investments.

* Seriously consider revamping the Start-up Fund objectives since not even 10 per cent of the outlay has been achieved. This could enable higher job creation.

* Focus on Real Ease of Doing Business instead of headline management.

* Emphasis on River Linking and Irrigation projects to seriously focus on reducing the distress of the agriculture sector while paving the way for higher employment generation and capital investment.

* Even if the above increases fiscal deficit to 4 per cent in a quest to increase GDP growth to 7.5 per cent levels it would be a decision taken in the right direction.

The government has managed the political scenario but to manage the economics of governance is a much tougher task since intention and will is required to “Walk the Talk”. It is hoped that the second woman Finance Minister lives up to the adage that the “Woman is a much better manager of funds”.

The writers are respectively National Spokesman, Indian National Congress, and Strategy Consultant for SMEs

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