08 July 2019
The government’s budget math
The first Union budget of the new government for the full year 2019-20 was chock-full of new measures designed to kick-start a flagging economy. The corporate tax rate has been reduced to 25% for all but 0.7% of companies that have an annual turnover higher than ₹400 crore. A number of measures have been proposed to deepen the market for corporate bonds, and in particular long-term corporate bonds for infrastructure financing.
The statutory investment limit for foreign portfolio investment has been raised from 24% to sectoral limits (presumably, the same as those currently applicable to foreign direct investment), with an option to individual companies of lowering the threshold if they wish. The scope of the securities transactions tax has been drastically curtailed to the difference between the settlement and strike price in case of options.
There are a large number of measures to promote entrepreneurship in startups, including a very interesting proposal to have a dedicated channel within Doordarshan, which will serve matchmaking function between startups and venture capitalists. The management of this channel is to be handed over to startups themselves. Tax concessions to startups are very liberal. Any verification of the sources of funds for these, and valuation of shares issued by them, has been de-linked from scrutiny by the income tax department. In lieu of these concessions to high net worth individuals, who are the angels or venture capitalists funding startups, there is a surcharge of 3% on individuals earning between ₹2 crore and ₹5 crore per annum and 7% on those earning more than ₹5 crore.
There are some other measures too numerous to mention, but I want to get to the essence of a government budget, which is to state its revenues and expenditures, and its net borrowing (the fiscal deficit) upfront. The speech by finance minister Nirmala Sitharaman had no mentions whatsoever of the fiscal deficit. This is the first time that such a thing has happened in my memory. It was mentioned by her informally after the conclusion of her speech, as having gone down to 3.3% from 3.4% in fiscal year 2018-19 by the revised estimates. There was nothing in the appendices to her speech either, but of course the figures were available in the first table in Budget At a Glance, one of the documents in the Budget set.
I want to look past those who have argued that in the present growth slowdown in India, it is ridiculous to watch the fiscal deficit. Whatever a person’s stand on whether there should or should not be fiscal restraint, the Budget statement has to first and foremost be a statement of the accounts of the government.
I will also look past those of us who are worried about the fact that the fiscal deficit in recent years has not included borrowing by public entities like the Food Corporation of India, which were previously funded directly from the exchequer, but are now borrowing from public accounts like the National Small Savings Fund.
But let that pass. In Budget at a Glance, the fiscal deficit is pegged at ₹7.04 trillion. If this is estimated at 3.3% of the budgeted gross domestic product (GDP), clearly we have to peer at the denominator a little. The GDP for the current year 2019-20 has been estimated to grow at 12% in nominal terms over its level in 2018-19 of ₹188.41 trillion. Putting together the numbers in the most recent monetary policy statement of the Reserve Bank of India on 6 June, inflation is forecast at 3.3% for the current year, and GDP real growth is forecast at 7%. The nominal growth rate can be no higher than 10.5%, worked out as a product.
Now, of course, the finance minister can argue that the growth-promoting measures in the budget will raise the real growth rate, and we hope they will eventually. However, a nominal growth rate of 12% is difficult to justify when RBI projects inflation anchored at a little over 3%. At the likely nominal growth rate of 10.5%, the fiscal deficit works out closer to 3.4%. Does this little bit matter? It does, if the government claims it has a strident commitment to fiscal discipline. What the small rise indicates is that the absolute fiscal deficit has risen more with respect to the previous year than nominal GDP.
The most encouraging commitment to fiscal discipline was acknowledgement of delays in government payments to suppliers and contractors, and the proposal for a payment platform to enable filing of bills and payment on the platform itself. It is confined to small-scale suppliers, but hopefully it will extend to large suppliers too. If honestly implemented, this alone will raise the fiscal deficit well beyond what is budgeted, since payment delays have become one of the instruments through which the reported fiscal deficit is kept under control.
The proposed interchangeability of PAN and Aadhaar has me deeply worried. Everything, like Form 16A for tax deducted at source (TDS), will become more cumbersome if the interchangeability between an alphanumeric and an all-numeric identifier is to be factored in. TDS as it stands is sufficiently problematic. It is entered manually, often with errors, and the proposal to pre-fill income tax returns, in place of form 26AS, could make it harder to correct those errors. The TDS pro-rating of income by banks is distressingly unconnected to the receipt of income by the taxpayer, which is unlawful, but who will go to our clogged justice system with such an issue?