When Modi Government 1.0 had assumed office in 2014, the macro-economic challenges before the country were high inflation, twin deficit — fiscal and current account — and a faltering GDP growth. In 2019, inflation, fiscal deficit and current account are less of an issue, but arresting the dwindling GDP growth and addressing the agrarian distress and fixing the financial sector woes have emerged as key challenges. Although technically the Budget is an annual financial statement of the government’s expected revenue and anticipated expenditure, it will be the first policy document of the Modi Government 2.0.

Also read:Budget expectations: Reviving growth, the key challenge

A good starting point could be FY20 Interim Budget. In this Budget, the aggregate tax revenue growth has been assumed at 14.9 per cent which is lower than 19.5 per cent achieved as per FY19 revised estimate (RE). Similarly, revenue expenditure is budgeted to grow at 14.4 per cent in FY20 compared to 13.9 per cent in FY19 (RE). However, the capital expenditure is budgeted to grow at only 6.2 per cent compared to 20.3 per cent in FY19 (RE). This shows that a significant amount of resources has been allocated for announced social welfare schemes, a departure from the previous Budgets where focus was on capital expenditure. Given the state of the economy and the issues facing farm sector, the Budget is unlikely to be any different. However, in view of the lower growth assumption with respect to both tax revenue and revenue/capital expenditure there may be some room available to step up expenditure to support growth.

Widening tax base

This, however, should not be at the cost of fiscal consolidation. The new government must focus on reducing tax disputes, increasing tax compliance besides ironing out the remaining glitches in the GST regime. Widening the tax base should be a priority because due to a smaller revenue base, India’s debt-revenue ratio is much higher than that of many other ‘BBB’ rated economies. In FY18, the country’s debt-revenue was 3.3x compared with the Fitch-rated ‘BBB’ country’s median value of 1.7x.

Other areas that should get mention and attention are the financial sector and private investment. A well-functioning financial sector is the life line of an economy. However, elevated banking sector NPAs and now the defaults on debt repayment in the non-banking finance sector (NBFC) has created a crisis in the financial sector. Infusing more capital into the public sector banks, removing the roadblocks for the speedy resolution of IBC cases and incentivising banks to buy good quality NBFC assets may ease the financial sector woes. Any announcement to this effect would be a welcome step. In the medium term, however, focus will have to be on strengthening of regulation, supervision and risk management practices in both banking and the NBFC sector.

Private investment

Reviving private investment remained a challenge throughout Modi Government 1.0 and will be a challenge even for Modi Government 2.0. The average investment growth during FY17-FY19 at 9.5 per cent though is healthy compared to the average investment growth of 3.6 per cent during FY14-FY16. However, it is heavily dependent on government capex spending. While the share of government (Centre + State) in total capex of the economy was just 12 per cent during FY12-FY18, private sector during the same period accounted for 76.5 per cent of the total capex. It is due to the slowdown in incremental private capex that the GDP growth has failed to accelerate and sustain itself close to or in excess of 8 per cent. Though there is no easy way out, a clear five-year road map on tax reforms, especially corporate tax rates, and measures to bring the stuck capital back into the production process by fast tacking the resolution of non-performing assets of the banking sector will go a long way in reviving the incremental private capex.

(The writer is Director (Public Finance) and Principal Economist, India Ratings and Research)

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