budget

Updated: Jul 06, 2019 07:57 IST

The 2018-19 Economic Survey presented on Thursday projected gross domestic product (GDP) growth in 2019-20 to be 7%. The Indian economy grew 6.8% in 2018-19. The Survey also set itself a target of making India a $5 trillion economy by 2024-25. This, it says, will require a growth rate of 8% during this period. While the Survey is a declaration of intent, the Union Budget is the actual policy instrument to achieve these goals. So, what does Budget 2019-20 tell us about the potential drivers of growth under the second Narendra Modi government? The budget has two ways to do this. It can either increase government spending and provide a direct stimulus or tweak policies which offer incentives to those outside the government to step up economic activity.

There is no big fiscal stimulus from the government’s side this year. Fiscal deficit as a share of GDP has come down by 10 basis points to 3.3% this year. One basis point is one hundredth of a percentage point. The government has managed this feat even as its Gross Tax Revenue (GTR) growth has almost halved.

GTR growth between 2017-18 and 2018-19 was 17.2%. It is expected to be just 9.5% between 2018-19 and 2019-20. Capital expenditure by the government has paid a bigger price for deceleration in tax growth. Annual growth in revenue expenditure has increased by 40 basis points between 2017-18 to 2018-19 and 2018-19 to 2019-20. However growth in capital expenditure, which acts as a catalyst for future growth, has come down by 13.4 percentage points during this period (see chart).

This means that the government is banking on the private sector to boost economic activity. While doing this it has thought of a wide portfolio. Income tax benefits for people who buy houses for up to ₹40 lakh until 2020 have been increased by ₹1.5 lakh.

There is also a plan to tap foreign capital ,including that of sovereign wealth and pension funds, to fund big-ticket infrastructure projects. Clearly, the budget is hoping that such policies will give a big boost to construction sector activity. There are other proposals to further liberalise the Foreign Direct Investment (FDI) regime in many other sectors.

The other important thing is an attempt to seize the initiative in industries which have a high growth potential in the future. Electric vehicles (EVs) are one such example. Indians are going to enjoy tax exemptions for buying electric cars for the first time in history. And global makers of EVs, solar panels, batteries, and other such can look forward to tax incentives. Automobiles are among one of the rare manufacturing success stories of India in the post-reform period. If electric vehicles are going to be the future of the automobile industry, India must do everything it can to retain its comparative competitive advantage.

The government has opened up an avenue for this investment by the private sector by deciding to get at least some of the money it needs from outside, presenting an opportunity for domestic savings to fund investment. DK Srivastava, chief policy advisor, EY India, said that the pressure on domestic savings and interest rates have been reduced by opening up a channel for tapping external savings as also by reducing the central government’s fiscal deficit to 3.3% of GDP. “This will facilitate a more effective transmission of the reduction in repo rate (the policy rate) to lending rates”. The repo rate is the rate at which the Reserve Bank of India (RBI) lends overnight money to commercial banks.

The government’s own infrastructure creation activities will also help the cause of growth, Srivastava added. “More direct support to growth will come from an increase in infrastructure investment which will be largely based on off-budget resources and public-private partnership initiatives,” he said.

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Banks, which will be recapitalised to the extent of ₹70,000 crore this year according to the budget, and non-banking financing companies (NBFCs), which have been provided some relief from the credit crisis they are currently facing, will also now have the headroom to fund investment, experts said.

Anand Rathi, chairman, Anand Rathi Financial Services Ltd, termed the budget growth-oriented and added that it lists various reforms that could be undertaken in the next five years. “The fiscal deficit has been contained at 3.3%. Steps taken to increase liquidity by way of infusing capital in banks and making funds available to NBFCs, coupled with higher infrastructure investments should help in revival of the growth without causing inflationary effect,” he said.

Experts said the intent of the government to provide a fillip to growth is clear in the budget, but that the outcome would be actually depending upon its implementation.

“The finance minister, in her budget, proposed several welcome steps such as promotion of MSMEs (2% interest discount , promotion of startup businesses (easing laws on angel taxes), lending government support to NBFC/ HFCs (housing finance companies) which will improve access of capital, simplification of labour laws and extending reduced corporate tax of 25% to companies with turnover of up to ~400 Crores. What will be important is operationalizing these initiatives at the ground level and building on some of these formative steps,” said Raghav Swaminathan, chief financial officer, Wipro Enterprises.

MSMEs is short for micro, small and medium enterprises.

Editorial | A disciplined, growth-oriented budget