Union Budget 2019-20: High on intent, Low on allocation

Sujit Kumar,
Senior Economist

The First Budget of Modi Sarkar 2.0 needs to be seen together with Interim Budget presented in February this year. There's broader continuity as far as budgetary allocation is concerned with small, but effective, changes under certain heads. 

Speaking of budget maths, it is based on nominal GDP growth assumption of 12% during FY2019-20, as against 11.5% growth assumed in Interim Budget. This seems quite optimistic given Economic Survey forecast a real GDP growth of 7%, thus implying inflation to be higher in remaining 9 months (~6%) to realise this nominal GDP growth number. If so, monetary policy need to be tightened, and not accomodative. If nominal GDP growth be taken at 11%, fiscal deficit will come at 3.4%. The slippages are likely more on count of optimistic revenue assumptions than expenses budgeted.

Further, expenditure mix is clearly biased towards revenue expenditure (14.3% y/y) as capital expenditure is budgeted growing at 6.9% over last year. Subsidies on major heads (food, fuel, fertilizer) is pegged at 1.4% of GDP, which is manageable given Crude is likely to remain around current levels. 

A Government prioritizing investment led growth will be expected to lead capex cycle than spending otherwise. 

Nevertheless, the decision to recapitalise public sector banks (Rs 700 billion in FY20) could be smart play as Banks can then leverage this fund ~15X. Assuming banks PSBs use half of this recap money for growth, it will create a loanable resources of Rs 5 trillion, part of which could be directed for capital intensive projects.

Similarly, the Budget proposal for providing credit enhancement of portfolios purchase from NBFCs could act as confidence building measure to restore liquidity in troubled times. 

There's ample signs of Government leading citizens into future with Budget announcing lots of sops for electric vehicles. Affordable housing has also got boost with additional deduction of upto Rs 1.5 lakh for interests paid on home valued upto Rs 45 lakh, taking cumulative deducted upto Rs 3.5 lakh on taxes. Large enterprises having annual turnover more than Rs 50 Cr will no longer charge merchant discount rate for digital payments while cash withdrawals exceeding Rs 1 crore an year from bank account will attract 2% tax deduction at source. These measures will nudge citizens towards digital payments. 

Of revenue mobilisation, Budget proposal to enhance surcharge on individual earning more than Rs 2 crore per annum is signs of Government consolidating it's median voter base, which is poor and middle class. More than revenue effect, this measure is likely to attenuate growing concerns on income inequality in country.

Likewise, the disinvestment target of Rs 1.05 trillion (vs Rs 0.8 trillion in FY19) is ambitious, given a global slowdown and concerns about financial market volatility which could make it difficult to push through asset sales. 

Government has budgeted for net market borrowing of Rs 4.23 trillion, similar to last year. This led to immediate softening of yields on Government securities. However, with budgetary math seen more on hope than substance, gains are unlikely to sustain.

To sum up, the Union Budget is always a delicate balancing exercise given competing expectations of different sectors of economy and segments of population. This budget is more on continuity of policies of first term of National Democratic Alliance government, even as it seeks to approach the growth slowdown with vigour.