A Credible Balancing Act
Although the term Interim Budget suggests it, this clearly is not a Budget meant to have a short shelf life. It has managed to deliver pro-growth impetus and still maintained fiscal prudence by eschewing overt populism despite pressures to the contrary.
The Budget has been able to provide a consumption stimulus for people who badly need it. Farmers will get it through a farm income package worth 0.26 per cent of the GDP stimulus and the middle class through income tax giveaways, accounting for 0.1 per cent of the GDP.
But how good is the agri income transfer scheme? Each farmer is likely to get Rs 6,250 in FY2019/20, which will be about 8 per cent of his income if we assume an annual income of Rs 78,000 per farmer (as established by Ashok Dalwai Committee). However, note that a farmer will get Rs 1,666 before general elections. The number should also be seen in the context of farm loan waivers amounting to Rs 1.8 lakh crore, announced so far by various states. Also, the scheme does not exclude farmers benefiting from the Rythu Bandhu scheme in Telangana and KALIA in Odisha.
The middle class is likely to get about Rs 6,000 per person due to enhanced exemptions. Standard tax deduction for a salaried person has been raised from Rs 40,000 to Rs 50,000; the TDS threshold on interest on bank and post office deposits has gone up from Rs 10,000 to Rs 40,000, and housing benefits have come in. There is focus on income security for the unorganised sector that employs 42 crore Indians. Put together, discretionary expenditure is likely to get a boost.
Fiscal Marksmanship
Not slippage but a pause: There was fiscal slippage in 2017/18 due to GST and also a small slip in 2018/19. However, adjusted for the income support scheme for farmers, fiscal deficit in 2018/19 comes to less than the targeted 3.3 per cent of GDP and the eventual 10 bps slippage at 3.4 per cent for the financial year is not going to be seen as negative as some slippage was factored in and meets the FRBM norm of 0.1 per cent of GDP reduction.
What causes the pause: There is a biting domestic slowdown in H2FY19. Moreover, the 2019/20 target of 3.4 per cent should be viewed in the backdrop of projected global growth stress, with all forecasters revising growth estimates downwards.
Quality of fiscal consolidation: The revenue deficit-to-fiscal deficit ratio, which captures the quality of fiscal consolidation, is slightly worrisome. It stood at 72 per cent in 2014/15 but was brought down to 59 per cent in 2016/17 - a big achievement. But it slipped to 75 per cent in 2017/18 and seemed to improve in 2018/19 at 65 per cent. What it shows is that the government is borrowing less for current expenditure. Thus, a critical fiscal weakness is showing an improvement although it may go up a little to 67 per cent in 2019/20.
Deficit hinges on GDP: Overall expenditure is slated to grow at 13.3 per cent compared to 11.5 per cent in nominal GDP. The government seems to be betting on growth that rides on its consumption stimulus on the farm side, the middle class and a helping hand from inflation.
Borrowings and interest rates: Net borrowing for 2019/20 is estimated to be Rs 4.5 lakh crore, which is flat, compared to Rs 4.4 lakh crore in 2018/19. Gross borrowing stands at Rs 7.1 lakh crore against Rs 5.7 lakh crore in 2018/19. The government will be using robust deployment from small savings of Rs 1.3 lakh crore and PF of Rs 7,750 crore to keep market borrowing low. This will help contain G-Sec yields in a narrow range assuming other things will remain unchanged.
Thus, in view of expectations wherein there were fears of the worst, this is a credible balancing act with far-reaching measures thrown in.
The writer is Chief Economist, Mahindra & Mahindra Group (opinion is personal)
