Global headwinds and challenges in the domestic financial sector moderated the growth of Indian economy in 2019-20. Against this background, the Narendra Modi government’s Union Budget 2020-21 has tried to take a calculated path to revive demand and boost economic growth. The underlying assumption in the Budget’s economic strategy is that the Indian economy appears to have bottomed out and is expected to pick up in 2020-21.
As widely expected, the Modi government has taken a deviation of 0.5 per cent of GDP in FY20 fiscal deficit. FY21 fiscal deficit has been set at 3.3 per cent. The nominal GDP growth for FY21 is projected at a reasonable 10 per cent. We expect real GDP numbers for FY21 to be around 5.5-6 per cent. The government has set an all-time high target of Rs 2.1 lakh crore of disinvestment for FY21 on back of LIC IPO and the pending/remaining disinvestments of FY20. Additionally, non-tax revenue is projected to expand on the back of telecom receipts, both adjusted gross revenue (AGR) dues and spectrum usage charge. Considering declining tax revenues, use of non-tax revenues has been frequently resorted to since FY10 for meeting fiscal deficit by the central government.
The new tax regime
Budget 2020 proposes to “bring a new personal income tax regime wherein income tax rates will be significantly reduced for individual taxpayers who forgo certain deductions and exemptions”, Finance Minister Nirmala Sitharaman said in her Budget speech. The new personal income tax rates will entail estimated revenue forgone of Rs 40,000 crore per year. Assuming a marginal propensity to consume of 0.70, the proposed revenue forgone of Rs 40,000 crore will translate into a consumption boost of Rs 1.33 lakh crore, but only if people migrate to the new tax regime.
Our estimates suggest that given the increased tax liability under the alternative dispensation, such a possibility of migration looks remote. In principle, the new tax proposals, though noble in intention, might not stimulate consumption demand immediately as India is a country with limited social security access and it is imperative that the government incentivise household financial savings.
The Modi government has proposed to increase the deposit insurance coverage to Rs 5 lakh per depositor from Rs 1 lakh previously. This is an excellent step. With this, deposit insurance coverage in India is now 3.7 times the country’s per capita income, only behind Brazil (7.1) and the US (4.2).
In Budget 2020, the Modi government has continued its focus on the MSME sector, with a particular emphasis on startups, to give a boost to entrepreneurs in the small and medium size industrial units. The government has eased the tax burden on employee stock options (ESOPs) by five years. It has also enhanced the insurance cover for export credit by banks under a proposed scheme Nirvik (Niryat Rin Vikas Yojana), which will particularly help the MSME sector.
Covering farmers, health
To address the shortcomings in agriculture sector, the Modi government has proposed a 16-point formula to revive it. Agriculture credit target for the year 2020-21 has been set at Rs 15 lakh crore and all eligible beneficiaries of PM-KISAN will be covered under the Agriculture Kisan Credit Card (KCC) scheme. The decision to cover all beneficiaries of PM-KISAN under the KCC scheme will provide financial support to farmers and benefit the banks at the same time. As against 14.5 crore farmers, there are currently 6.92 crore active KCCs.
The Modi government has allocated Rs 69,000 crore for the health sector, an increase of about 8 per cent compared to the previous year. Budget 2020 has announced the expansion of Ayushman Bharat Yojana by setting up more hospitals in tier-II and tier-III cities under the public private partnership (PPP) model.
Disruption in education
Budget 2020 has given a massive thrust to skill development and education. The New Education Policy, which will be announced soon, will carry the fine imprints. The Budget envisages India as a preferred destination for education for foreign students, which implies export of education services from India. Just as brick and mortar model in banks is challenged by digital technology, the same disruption is happening in education with brick and mortar models becoming expensive. The Budget’s announcement to start a degree level full-fledged online education programme by top 100 institutions is a right step in keeping the cost of education and skill augmentation affordable.
The Union Budget 2020-21 proposes scheme to encourage manufacturing of mobile phones, electronic equipment and semiconductor packaging. This proposal comes very close to Finance Minister Sitharaman’s suggestion in the Economic Survey to integrate ‘Assemble in India for the World’ into ‘Make in India’. The underlying logic is similar to what was done in China. In recent times, some relocation has happened.
Relying on small savings?
A key focus area in Budget 2020 is “infrastructure”. India’s infrastructure spend has hovered in the range of 5.3-6.2 per cent of nominal GDP between FY13-FY19. The government has come up with an infrastructure investment plan until FY25, which entails investment worth Rs 102.5 lakh crore with highest investment in roads, urban infrastructure, railways and power. FY21 and FY22 are going to see the major push in spending.
To fund expenditure, the Modi government, apart from market borrowings, has also dipped into National Small Savings Funds (NSSF) to meet a part of its expenditure and support struggling PSUs. In the current fiscal, the government has transferred close to Rs 70,000 crore in food subsidy to the NSSF. For FY21, the government has estimated Rs 2.4 lakh crore (or 30 per cent) of fiscal deficit funding from small savings. This increased reliance on small savings would, in turn, make it difficult for the government to cut small savings interest rate, which means competing bank deposit rates would be unlikely to witness a material decline from the current levels. This will make it difficult for interest rates to decline.
The author is Group Chief Economic Advisor, State Bank of India. Views are personal.