Analysis

GDP growth was 4.5% year-on-year in the July-September quarter of 2019/20, down from 7.1% in the corresponding quarter of 2018/19 and the lowest year-on-year rate in any quarter for six years.

The slump is the result of slowing demand; consumption has long been the main driver of India's growth. The deceleration is partly due to fiscal consolidation and partly due to the end of a medium-term upswing in bank credit growth.

It had been widely expected that Sitharaman's budget for 2020/21 would offer substantial fiscal stimulus in order to revive demand and in turn growth.

The budget offers only very modest stimulus, mainly in the form of increased spending on agriculture and highways. Whereas government expenditure is now estimated at 13.2% of GDP for 2019/20, having been budgeted at 13.6%, it is projected at 13.5% of GDP in 2020/21.

Sitharaman said the budget entails no spending "splurge".

Fiscal prudence?

The government's reluctance to spend is largely because of its ostensible commitment to fiscal discipline. It aims to show a fiscal deficit that deviates from budgeted targets by no more than the 50 basis points permitted, in special circumstances, by the Fiscal Responsibility and Budget Management Act (FRBMA).

The 'official' fiscal deficit for 2019/20 is now projected at 3.8% of GDP, compared to a budgeted 3.3%. The target for 2020/21 is 3.5%. The FRBMA, following amendment in 2018, had required the deficit to be brought down to 3% by 2020/21.

The finance minister admits that the 'actual' fiscal deficit is higher than the official one. She has released figures indicating that the fiscal deficit should be 4.6% of GDP in 2019/20 and 4.4% in 2020/21, if off-budget expenditure is taken into account.

The government's off-budget transactions include borrowing by public sector entities such as the Food Corporation of India to finance expenditure. Critics say off-budget manoeuvres undermine the administration's claims to be adhering to fiscal prudence.

Meanwhile, the government is relying on revenue windfalls to help rein in the fiscal deficit, irrespective of how it is calculated.

One windfall may come from a Supreme Court judgement upholding the government's claim that telcos had underpaid licence fees and spectrum charges. The Court ordered the firms to pay the relevant sums, besides interest on the payment as of the due date and penalties for non-payment of sums and interest due.

The 2020/21 budget provides for a 740-billion-rupee (10-billion-dollar) increase in revenue from the telecoms sector, although finance ministry officials claim they have not factored in payments due from telcos as a result of the Supreme Court judgement. The finance ministry is probably wary of increasing the pressure on firms that may require waiver of some of the dues to survive.

The increase in revenue from telcos may come from the sale of 5G spectrum.

Another source of fiscal boosts for the government may come from disinvestment. Receipts from sale of public sector equity in 2020/21 are projected at a record 2.1 trillion rupees. This includes 1.2 trillion rupees from privatisation of non-financial sector public enterprises and 900 billion rupees from sale of equity in public sector banks and financial institutions such as the Life Insurance Corporation of India.

Receipts from disinvestment will likely be far short of expectations in 2019/20, because of market conditions and a lack of administrative clarity. Although 1.1 trillion rupees had been targeted for the whole fiscal year, receipts for the first ten months totalled just 200 billion rupees. The government now projects receipts of 650 billion rupees for 2019/20.

Tax concessions

The budget confirms that the government is counting on tax concessions to spur consumption and private investment.

Sitharaman in September 2019 reduced corporate tax rates to 22% (15% for new manufacturing entities) from 30%. Partly as a result of this cut, receipts from corporation tax in 2019/20 are projected at 6.1 trillion rupees compared to a budgeted 7.7 trillion. In 2020/21, when the full-year loss in revenue will be registered, receipts are projected at 6.8 trillion rupees, but this may be optimistic.

Although the cutting of corporate tax temporarily placated businesses and triggered a brief rise in stock market indices, it did not generate much revival in demand.

Sitharaman nonetheless offered further tax concessions to the corporate sector in the 2020/21 budget, perhaps encouraged by the stock market boom late last year. She abolished the dividend distribution tax levied on firms. This could reduce government revenue by 250 billion rupees.

The budget also offers tax relief to middle-class people. Changes to the structure of personal income tax mean that those on lower incomes have the option of being taxed at a very low rate, if they give up tax exemptions available for those diverting taxable incomes to certain savings schemes or investments.

Few are likely to take up the new option, as they are unlikely to gain financially.

The government already faces lower revenues as a result of reforms to the structure of indirect tax (see INDIA: States will push back on central government - January 30, 2020). The Goods and Services Tax (GST) introduced in 2017 was designed to simplify an array of excises, sales taxes and 'sin' taxes at central, state and local levels. The central government's GST revenues in 2019/20 are projected at 5.1 trillion rupees compared to a budgeted 5.3 trillion.

The central government's GST revenues are projected at 5.8 trillion rupees in 2020/21, but this may be optimistic.

Missteps?

The Modi government appears to be prioritising long-term solutions for reviving growth. The budget includes measures relating to bond market resuscitation, viability gap funding and improving the ease of doing business.

There is also a protectionist approach. By increasing duties on several imports, the government aims to incentivise investment in domestic manufacturing, which may translate into greater employment and in turn greater consumption. The emphasis on local manufacturing resonates with Modi's 'Make in India' initiative, which has flagged since its launch in 2014.

The budget disappointed stock market investors expecting measures such as abolition of long-term capital gains tax.

Moreover, the government has eschewed certain measures that might have helped in the short term to raise incomes and thereby lift consumption, especially in rural areas (see INDIA: Helping farmers only partly eases rural crisis - January 9, 2020).

Most tellingly, the budget allocated only 615 billion rupees to the National Rural Employment Guarantee programme, compared to 710 billion in 2019/20 and 618 billion in 2018/19.