Budget 2020: Experts shed light on focus areas – india news

The Union Budget is a virtual smorgasbord of numbers, but here’s what some top economists will be looking at (and why) when the finance minister presents the finance bill on Saturday. The ones most pick: disinvestment target; tax revenue; government expenditure (especially capital expenditure); and the primary deficit.

Maitreesh Ghatak, Professor, London School of Economics

Tax collection: First, I would look out for the actual numbers on tax collection, especially given the reports of shortfalls, as that is an important measure of state capacity to do anything.

Government expenditure: From this, If I have to mention one number, that would be if the allocation for welfare schemes has gone up or at least maintained, as slowing consumption demand from the masses is a leading cause behind the economy slowdown. Besides that, these schemes affect the poorer and more vulnerable sections. Capital expenditure on infrastructure would be another number I would watch out for, because of its dual role in enhancing demand and boosting productive capacity.

Disinvestment: To get a sense of the longer-term policy direction of the government, I would watch out for the number on disinvestments to see if the government is serious about reforms. I would be equally curious to see whether and how much import tariffs go up, or whether the pattern of changes in tax rates favour the well-off.

Vidhya Soundararajan, Assistant Professor (Economics), Indian Institute of Management, Bangalore

Government schemes: To improve spending, a revision of income tax slabs is expected. But with a large majority engaged in casual work, a boost to infrastructure, employment, and welfare program allocation is imperative to increase cash in hand. Specific details of the pre-announced National Infrastructure Pipeline and other schemes are to be watched out for. The government should not miss rural inclusion in these projects.

Tax measures: Disinvestment targets remain unmet, and tax revenues have been slowing; these are exacerbated by, and will in turn hurt, the slowing economy. Will the rumoured increase in Goods and Services Tax (GST) rates solve problems or hurt even further? Should we instead focus on improving tax compliance, and sharing the compensation cess with states? Steps taken here would be crucial.

MSME boost: MSMEs contribute to 29% of the GDP. Encouraging this sector can raise entrepreneurial spirits, foster employment growth, and spur rural/semi-urban economic activity during this downturn. While the MSME ministry has requested a 70% jump in the sector’s funding in FY20-21, government action is awaited.

Pranjul Bhandari, Chief India Economist, HSBC.

Disinvestment target: The government will have to strike a balance between being ambitious and being realistic. We expect a doubling in disinvestment revenues from an expected Rs 65,000 crore in FY20 to Rs 1.3 lakh crore in FY21. This, in our view, will be critical for any fiscal consolidation in FY21.

Tax buoyancy. This is basically the ratio between growth in taxes and growth in GDP. The tax buoyancy is likely to have fallen to 0.5 in FY20. But efforts to improve the GST compliance regime could push it back up to 1-1.2 in FY21.

Import tariffs: The third think to look at is the number of items for which the import tariffs are raised. The government has been raising import tariffs on a number of items in each of the last three budgets. Our research shows that an import tariff can act like an export tax. It can come in the way of India integrating into global supply chains.

Pranab Sen, Economist, Former Chief Statistician of India

Fiscal Deficit: This is a measure of the government’s intention to boost the economy. If it is less than 4%, then we should worry since it means continuing contraction on government’s part. Between 4 and 5%, it is at best status quo. Only if it is above 5% do we have any hope of a genuine turnaround.

Tax revenue: This has been a particularly weak area in the last two budgets, where there has been gross overestimation. Realistically, this year’s BE (budget estimate) should not be more than last year’s BE. If it is much higher, then again we should worry since it will mean continuing “tax terrorism”.

Disinvestment: There have been many statements of intent but little to show. Public-sector undertakings (PSUs) have been hollowed out by various means to show performance on this. There is little left to squeeze out. This time, therefore, a disinvestment target could mean what it says.

Niranjan Rajadhyaksha, Research Director and Senior Fellow, IDFC Institute

Primary deficit: A lot of public attention will quite rightly be focused on the fiscal deficit. However, the primary deficit numbers give us a good sense of the fiscal direction an economy is taking. It is especially useful to identify turning points.

The primary deficit excludes interest payments of the government, which is the cost of past borrowing. It is hence a good indicator of the current state of public finances.

The primary deficit has come down from 2.8% of the GDP in 2011-12 to 0.2% of the GDP in 2018-19. It is expected to shoot up this year.

The size of the increase will determine a fiscal turning point. Also, a large primary deficit is a worry when nominal economic growth is lower than the rate of government borrowing. India is close to that situation right now. That has serious implications for the sustainability of public debt.

Tax buoyancy: The July 2019 budget unrealistically assumed a tax buoyancy of 1.6, or that the government would collect Rs 1.60 of extra taxes for every Re 1 of extra GDP. That number is among several unrealistic assumptions in the previous budget. The tax collections – both direct and indirect – through the current fiscal year suggest that the actual tax buoyancy will be far lower. In fact, tax buoyancy has been less than 1 in six out of the previous 10 years.

In other words, tax collections have lagged economic growth. This has two implications. First, it tells whether tax reforms are delivering in terms of higher revenues. Two, it gives us an idea whether there will be enough fiscal capacity to meet the various security, public goods, and welfare commitments of the government.

For context, the highest tax buoyancy in recent times was 2.4 in the fiscal year ended March 2003.

Spending trends: The broad consensus among economists right now is that the government has to increase spending to support the economy till private sector demand revives. The question is, how? There are two choices – welfare spending or capital spending. The advantage of capital spending is that it provides more bang for the buck in the long term, or what economists call a higher multiplier. The disadvantage is that it takes very long for new projects to get off the ground in India. Welfare spending does not have the problem of delayed impact because it puts money directly into the hands of the poorest. But its impact fizzles out very quickly. The spending strategy in the budget will thus be important at a time when the economy is limping. Of course, the finance minister may eventually decide to fire up confidence in the urban middle-class through an income tax cut.

Ajit Ranade, Chief Economist, Aditya Birla Group

Primary deficit: This is the fiscal deficit without the cost of servicing past debt. If this number is zero, it means that the deficit in the previous year is on account of servicing past debts and the government has done well in managing its current spending. If this number is significant, then I will look at the quality of spending.

Revenue vs Capital spending: Capital spending by definition is aimed at financing investments which contribute to future growth. Although it technically includes only physical capital I would like to include spending health and education in the capital spending bracket too, as they augment our human capital.

Revenue projections: Because the nominal GDP growth for 2019-20 is at a four-decade low, it is difficult to see the next fiscal year’s growth numbers crossing 10-11%. This will have an adverse impact on revenue collections too. If the tax projections in the budget are too optimistic, then it will only hurt the credibility of the budget numbers.