Budget 2020: How to make things work this time? Spend, spend, spend : 16-01-2020

2019 has been a year when the economy went through various phases of economic swings and by now it has been accepted that there is a slowdown in the economy. The emphasis so far has been on monetary policy where the MPC has carefully deliberated the situation and lowered the repo rate by 135 bps. This was good from the supply side where the attempt was to make the cost of capital lower for industry. But with the problem being largely on the demand side, the impact tended to be limited. There has ..

hence been a call for a fiscal stimulus, given the fact that monetary policy has its limitations.

The FM has been proactive in terms of addressing sector-specific issues so far. With the Budget coming up, there is scope for enhancing the effectiveness of fiscal policy to revive growth. In the last few months the FM had lowered the corporate tax rate which was to give a boost to corporate profits which in turn should set the stage for higher investment and growth. While it is too early too early to judge the efficacy of this measure, it was observed that most companies took advantage of the lower tax rate but have not yet invested the same. There is speculation that companies may be using the same to pre-pay debt or enhance dividend in difficult times to keep up investor sentiment. Clearly, something more direct is required to ensure that spending takes place.

The Budget will be presented at a time when there is uncertainty on revenue collections for FY20 leading to fiscal slippage. If the goal is to use this opportunity to focus entirely on growth, what should the FM do?

The first measure is ideological wherein the government should skip the fiscal path of prudence and make a more realistic budget that focusses single-mindedly on growth. Therefore, the fiscal deficit ratio should not be the starting point of the exercise (which it is today, as all other numbers are decided based on this end-ratio). This will mean that it should not be a compromise number of being within the 3-3.5% mark but a bold measure that keeps the number 1% higher than the deficit in 2019-20 .Hence, if the FY20 fiscal deficit comes in at 3.8%, there would be a deficit of 4.8% for FY21 which really provides scope for growth. With India’s GDP at around Rs 210 lakh crore, 1% fiscal slippage means around Rs 2 lakh crore.

Second, the extra money that will come from the enhanced fiscal deficit has to be accounted for by higher expenditure and/or lower tax rates. This will be a delicate call to take. One option is to channel the entire amount into capex which will enhance the outlay from Rs 3.4 lakh crore (FY20-B) to Rs 5.4 lakh crore and directly add to demand for other products of industries like cement, steel, machinery, etc. These backward linkages built by higher outlays in roads, railways and urban development can kickstart the growth process immediately. The important thing is to start such spending immediately from April onwards.

The alternative is to balance the same across tax cuts and expenditure. With corporate tax already being rationalised, there is a strong case for lowering of income tax rates in such a way that there is more spending power. The focus of the government so far has been on providing sops at the lower level of the income scale. But this will not be adequate as the spending power at the lower levels tends to be limited — especially when inflation, especially food inflation, is rising. Even at the cost of providing benefits to the higher income groups, sops at this end would work to revive demand as benefits on, say, capital gains can help to channel demand into high-end goods such as housing and automobiles.

Third, the PM-Kisan Scheme is a well-constructed one which provides Rs 500/month to every family. This amount has to increase to have an impact as the present amount is too small to make a difference. While it was a good pilot to begin with, it needs to be substantial to make a difference. Probably, some of the social schemes that are not really delivering results can be abandoned based on government audit and the money given directly to the poor so that their spending ability improves.

Fourth, the disinvestment calendar has to be stated at the time of the Budget so that it does not hang in abeyance for the entire year, which has been the case till now. It is a very useful source of revenue as there is potential to get Rs 1 lakh crore every year which can be used to shore up the budget or even better, be used to earmark specific capital expenditures. As there is a lot of reluctance to sell such assets, the plan should be stated upfront in the Budget and the timeline provided so  so that the exercise becomes a reality.

The FM has already announced measures to ease the tax system in terms of processes and procedures as well refunds and tax credits which hopefully should make things easy for all tax payers. As most of the policies for various sectors have been announced, the Budget can concentrate on this single goal of reviving economy through spending in the most efficient manner. It will mean some trade-offs in the sense that there can be a tilt towards the higher income groups, but may be necessary to make the engine fire. It should be remembered that a high outlay spread across a wide mass of people — though egalitarian and necessary during normal times — cannot deliver results in tough times. Hence it has to be concentrated in areas where spending power resides.

In this context too, the GST framework needs to be revisited. First, if price transmission has not taken place, the same needs to be brought forward to the authorities. Second, the relationship between price and demand should be studied closely and tax rates adjusted in the next round of meetings. Rather than changing rates based on the level of affluence, it should be based on elasticity of demand to ensure that the tax revenue actually increases

In short, if the Budget has to succeed in reviving growth, the focus should be on spending with some compromise on the fiscal ratios. In a way it will be a fiscal holiday, but it’s worth a try nevertheless.

Source : PTI

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