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Home / Opinion / Columns /  Opinion | Sitharaman has pulled off a skilful balancing act

First, let us dismiss the stock market reaction as a commentary on the Union Budget for 2020-21 presented by the finance minister. It is a reaction to the stock market swoon in the US on Friday, which, in turn, was due to rising concerns over the global economic impact of the spreading coronavirus. That has prompted a correction of the divergence between financial asset prices and the lack of underlying economic vigour in the developed world. Indian stock market declines mirror a global decline.

Under the circumstances, the finance minister has done a deft balancing act between fiscal prudence, fiscal credibility and addressing short-term growth concerns. The revised fiscal deficit is 3.8% of gross domestic product for 2019-20, versus the original budget estimate of 3.3% of GDP, and the higher fiscal deficit compared to the original budget estimate is being financed largely through borrowings from small savings. Further, the Internal and Extra Budgetary Resources (IEBR) mobilized directly by public sector enterprises for 2019-20 is now 6.22 trillion (Revised Estimates or RE) versus 4.44 trillion (Budget Estimates or BE).

For example, for 2019-20, it was not envisaged that the Food Corporation of India would borrow from the Small Savings Fund (SSF). The expectation was that the investment in FCI from the SSF would be at 67,000 crore by the end of the financial year. Revised estimates show that SSF will have invested in (or lent to) FCI to the tune of 2.545 trillion. Investment by the SSF in other public agencies in 2019-20 is 3.7 trillion (RE), versus 2.49 trillion (BE). The good news is that the government envisages lower recourse to the IEBR in 2020-21 and it has also budgeted a lower amount in terms of dividends from the Reserve Bank of India, nationalized banks and other financial institutions ( 89,648.51 crore BE for 2020-21 versus 1.52 trillion RE for 2019-20).

The government hopes to achieve a fiscal deficit of 3.5% of GDP in 2020-21. While its nominal GDP growth assumption of 10% is realistic, and so are tax revenue growth assumptions (at first glance), success in achieving the fiscal deficit target will depend on the government being able to sell stakes in financial and non-financial enterprises, including in Life Insurance Corporation of India. That would, in turn, depend on the fortunes of stock markets around the world. That is why the risk of India’s fiscal arithmetic and economic growth turnaround lies mostly outside.

The finance minister addressed most of the issues that economists and financial market participants wanted her to address. Dividends will now be taxed in the hands of the recipients and not in the hands of the company declaring it. Personal income tax rates have been rationalized. Taxpayers now have the option of being taxed at lower rates without exemptions, or by the old method with exemptions. The finance minister has removed close to 70% of the exemptions under the new scheme and she has promised to remove the rest in the coming years. Further, the new simplified tax structure allows for pre-filled forms without the need for recourse to experts. If that becomes the pervasive reality, it will be a big improvement in Ease of Living for taxpayers. One hopes that, over time, the government would opt for one system of having simpler and reasonable rates with no exemptions. The reduction in personal income tax rates, coupled with an enhanced deposit insurance cover and a categorical announcement on deposit protection, augurs well for improved consumer sentiment and spending.

The proposed amendment to the Factor Regulation Act to enable non-banking finance companies to extend invoice financing to Micro, Small and Medium Enterprises (MSME) via Trade Receivables Discounting System (TReDS) is an important step. It will improve working capital access for MSMEs. More importantly, TReDS has to be automatically linked to the e-invoicing under the goods and services tax (GST) platform. A business can register its invoices on the e-invoice platform through multiple registrars who generate the invoice reference number (IRN) and check with the GST system registry to avoid any duplication. The GST system responds with a validated IRN along with QR code. At this point, this information could be sent to TReDS platform as valid invoice information. With this integration, e-invoicing can truly achieve its potential to be a game changer in digitalizing supply chains and inventing new financing schemes. However, an invoice can be cancelled even after generation of an IRN (through the invoice registration portal, if done within 24 hours, or through the GST system later). Such information should also be transmitted to TReDS.

The proposals to sell the remaining government stake in Industrial Development Bank of India, partially sell its stake in LIC, and corporatize at least one major port, plus the promise of more governance reforms, including greater transparency and professionalism in public sector banks, as also the promise of a new educational policy soon and of opening up higher education to foreign direct investment, along with a slew of other initiatives in this sector, suggest that the government is clear about doing what it can to enhance the medium-term growth prospects of the Indian economy. However, whether the budget is able to restore vigour to the Indian economy in the short run may depend on the coronavirus.

V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister

These are the author’s personal views

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