As the new finance minister prepares to unveil this year’s fiscal Budget in Parliament on Friday, July 5, consumers, investors, corporations, and market observers are expecting a renewed focus on development and growth, on the planks of which Prime Minister Narendra Modi returned to power in May.
Most of the allocations will be in line with the interim spending plan presented in February, but a greater focus on growth and related goals will replace the erstwhile fiscally austere policies.
Nirmala Sitharaman’s maiden Budget will presumably boost spending on big infrastructure (roads and railways), agriculture and healthcare reforms, and all other sectors that will eventually enable India to become a $5-trillion economy by 2025.
With revenue from consumption taxes and customs duties failing to meet targets last year, the newly appointed FM is, however, tasked with finding additional resources to fund Centre’s welfare programmes without increasing the tax burden on individuals.
Fundraising by divestment
One effective means to boost revenue will be by divesting state-owned assets, as the government had done last year with Coal India and Bharat Electricals, raising Rs 850 billion.
Despite the criticism against selling off stakes in PSUs, instead of seeking to revive them, the disinvestment target is pegged at Rs 1 trillion, higher than the Rs 900 billion penciled-in in the interim budget.
Days after debt-ridden BSNL floated the possibility that around 31% of its 1,74,312-strong workforce would be laid off, the central government announced it was musing a divestment plan for the erstwhile Navratna public sector undertaking (PSU) along with another state-owned telecom firm, MTNL.
BSNLs revenue share dropped by 20% following Jios entrance in the telecom sector in 2017-2018, and the PSU started incurring heavy losses because of a high revenue-to-debt ratio.
Whether BSNL, MTNL, ONGC, and other incipient sick PSUs will follow Coal India, despite their revival plans being chalked out as we speak, remains to be seen.
RBI and surplus
The RBI has notably slashed interest rates thrice this year; so now, it’s up to the government to take up responsibility for the sluggish economic growth, experts claim.
Questions regarding excessive surplus, a sore point over which the central bank and the government tussled last November, could also be raised and answered during the session.
The Reserve Bank of India pays annual dividends to the State. In February, it made an interim payout of Rs 280 billion. But the government is seeking to extract higher dividends from RBI to help boost its revenue and finance the current account deficit; Finance Ministry officials estimated the central bank has surplus capital of Rs 3.6 trillion.
The Budget will give a provisional figure on how much will be transferred for the remainder of the fiscal year.
Moment to shine and lead
Soumya Kanti Ghosh of the State Bank of India told ET that this may be a decisive moment for NDA 3.0 to shed fiscal austerity and step into development mode, primarily by jump-starting consumption that keeps slipping.
Claiming this to be true, the publication also cited India’s recent downgrade from the fastest growing global economy last year, after damning reviews exposed the highest unemployment rate in three decades and widening economic disparity.
Shortly after Modi’s reelection, the US withdrew the crucial preferential trade status, threatened against importing Iranian oil and fumed at New Delhi for imposing retaliatory tariffs on American goods.
Start-ups and alternative energy
Speaking of oil and energy, Sharan Grandigae, founder and CEO of Redd Experience Design, says the alternative energy industries are looking forward to the government laying the right foundations for both short- and long-term stability.
“The Budget should take a two-pronged approach where, on the one hand, it continues to encourage start-ups to form and grow, and on the other, to boost the development of alternative energy industries,” he told Qrius over email.
The government must refocus on encouraging more players to get into alternative energy production and storage and distribution, help find markets for the consumption of this energy, and develop an energy-trading platform to sell homemade power.
“To do this, the government should allocate more towards the electrification of vehicles involved in public and goods transportation as well as increase incentives to consumers who want to use electric cars and bikes for their personal transportation,” says Grandigae. Once effectively monetised and supported, solar and battery-generated power industries will automatically increase jobs.
Noting that India has fewer start-ups today than Israel despite ranking high on the ease of doing business index, Grandigae further seeks help for start-ups to establish themselves, raise funds, file taxes, and hire and manage human resources while reducing the obstacles licences pose.
“The government should also continue to incentivise the establishment and development of start-ups in tier-3 and -4 cities as well. The potential pay-off from helping to build such an ecosystem cannot be fathomed as it could possibly change industries completely or give birth to new ones that arent even on our horizon today.”
Banking and NBFC sector
Growth has slowed to a five-year low of 5.8% in the first three months of 2019well below Chinas 6.4% expansionputting pressure on Modi to deliver.
With the impending Union Budget, markets are expecting the government to inject capital into state-owned banks, after the massive Rs 1.06 trillion equity infusion plan last year. Watchers also hope that the Budget lays down measures to mitigate the liquidity crunch faced by the shadow banking sector.
According to Mint, while most banks have cleaned up their books and shored up balance sheets, NBFCs that borrow from banks and mutual funds are not in the clear.
Costs of operations have shot up, especially for small-scale NBFCs. Not only do they have no money to lend, but banks now want NBFCs to promise higher returns on the loans they buy from them.
Consumption, corporate investment, and real estate
It is the latter, coupled with consequently higher interest rates, that stands to affect the construction sector and auto and jewellery firms. Their reduced capability to lend is also behind the stunted consumption and corporate investment, especially in the fast-moving consumer goods (FMCG) and automobile sectors.
Indias shadow banks, however, have the biggest exposure to the real estate sector. So any measure to lower tax rate on property transactions could benefit the sector, opines SBI’s Ghosh.
Parag Kulkarni, managing director of A. O. Smith (India) agrees. Speaking to Qrius, he said: “Growth is an area, which we are sure is top on this government’s priority, and this Budget should address that.”
“One key sector that we believe needs addressing is the residential real estate sector, and the expectation is that this Budget will provide a much needed fillip to the sector. It generates large-scale employment as well as helps multiple industries, who are invested in India.”
Balancing the Budget gap
Consumers are hoping for further tax relief; sources familiar with the Budget document revealed to ET that the government is planning to raise the personal income tax threshold for certain individuals to that effect.
However, analysts at the Kotak Mahindra Bank calculated that tax revenue will probably be Rs 1.4 trillion lower than that forecast in the interim budget. This is a significant threat, they added in a note.
Increased spending and tax cuts will widen the budget gap to 3.5% of the GDP in the current fiscal, from 3.4% targeted in Februarys interim budget, a Bloomberg News survey further corroborated. Maintaining this gap, without risking a fall in credit rating or rattling bond markets, will call upon Sitharaman’s balancing act.
Expectations vs reality: How will it be?
“Public has a lot of hopes and expectations attached to the Budget, and it is going to be a tough job for the new FM, Nirmala Sitharaman,” says Rajeev Shah, senior partner of Mumbai-based chartered accountancy firm, Bihani & Shah. “Relief for the middle class and measures for economic revival, leading to employment, specifically, in the MSME, Housing/Realty sector, are among public’s major expectations.”
While voicing faith in the new FM, Shah acknowledges that she faces innumerable constraints and challenges. PM’s focus is on “correcting and setting the system, through various checks and compliances to deal with corruption,” he says.
The upcoming spending plan will hopefully revive the economy and give it the stimulus it needs at a time when global economic growth has slowed in light of Brexit, the US-China trade war, and other geopolitical uncertainties.
But in light of the recent AES outbreaks and resurgence of leprosy, the government should ideally increase spending and monitoring of the healthcare system.
Varun Gera, founder and CEO of HealthAssure, reminds the government that prepoll promises with respect to Ayushman Bharat should be timely met, with allocation of funds and implementation for both in-patient as well as outpatient commitments.
“Honouring this commitment is important but will not be easy for the government to significantly reallocate the Budget from other areas to health,” he says.
“I expect the NDA government to bite the bullet and at least triple the government healthcare budget over the next two years, from the low of 1.2% currently. There are many countries with high costs and inefficient healthcare operating systems. For this reason, apart from allocating appropriate budgets, its important for the government to initiate appropriate building blocks, take right decisions and good implementation in this sector to further develop the healthcare ecosystem in India.”
Prarthana Mitra is a Staff Writer at Qrius