Wednesday, September 30, 2020
Home Budget 2020 - 2021 Union Budget 2020: Challenge Before Nirmala Sitharaman is to Keep Treasury in...

Union Budget 2020: Challenge Before Nirmala Sitharaman is to Keep Treasury in Balance

While the estimated growth has been slashed to 5%, the possibilities of reduction in the policy interest rate are also receding. This may dampen the hopes of increase in investment, housing and consumer demand.

Budget 2020-21 will be presented in Parliament by Finance Minister Nirmala Sitharaman on Saturday. This budget is supposed to be one of the toughest in recent times.

Recently, former finance secretary Subhash Garg wrote a blog, saying the actual fiscal deficit for 2019-20 will be 4.7 percent compared to 3.4 percent of GDP, as given in the budget estimates. The major reason for the increase in fiscal deficit is that receipts fall short of the estimates, both direct taxes and indirect taxes.

There was a shortfall of Rs 1.7 lakh crore in the actual revenue receipts compared to the budget estimates in the previous year 2018-19 also. This decrease was equal to 11 percent of the budget estimates.

In November 2019, the chairman of the Central Board of Direct Taxes (CBDT) had said that against the central government’s target of Rs 13.35 lakh crore, its receipts of direct taxes were hardly Rs 6 lakh crore and indicated that direct taxes receipts could fall short of estimates. He said that Rs 1.45 lakh crore may be lost in revenue due to reduction in the rates of corporate taxes alone.

On the other hand, GST receipts are also not very encouraging. Slowing of the economy, fraudulent input tax credit based on fake invoices and deficiencies in the GST network, may make Union government lose nearly Rs 80,000 crore this year.

Though concerns of revenue shortfall are alarming, the economy desperately needs a big boost from the budget. Unemployment, as per the NSSO estimates (which government has dumped for the time being), is at all-time high, the economy is facing the worst slowdown, aspiration of the youth is at all-time high; there is no alternative to a big push to revive rural economy and rural demand both.

Rural sector has huge potential for growth in employment by encouraging food processing and allied activities, including dairy, poultry, fishing, bamboo production, horticulture, floriculture, rural industries etc.

Similarly, jobs are needed in urban areas too. We need to promote Make in India, which is possible primarily through import substitution. For this, the FM need not spend much. What she can do is identify items where domestic capacity exists, and raise their tariffs. Apart from much-needed protection of the domestic industry, this would also help starving exchequer.

Contrary to general perception that this would amount to violation of WTO rules, protection and promotion of domestic industry is possible by remaining within the limits of WTO-bound tariffs. It would be worth mentioning here that, at present, the average applied tariff of India is less than 10 percent, against bound tariff (tariff limit allowed as per WTO agreements) of 40 percent.

The reason behind lower tariffs much below bound is the obsession towards free trade of our policymakers in the past. Now, when in the last two years, the government has come out of that obsession, and rightly so, it is expected that the government would further deepen its efforts towards Make in India.

Deficit Curbed by NaMo Govt

When Narendra Modi assumed power, bringing clarity in economic policy, the first decision was to keep the fiscal deficit within limits, as per Fiscal Responsibility Budgetary Management (FRBM) Act. In the last budget of the UPA government (which was interim budget of 2014-15), the then finance minister P Chidambaram proposed estimated fiscal deficit at 4.1 per cent of GDP and the revised estimates of fiscal deficit for the year 2013-14 was also shown to be less than actual.

However, economic analysts at the time did realise that the estimated fiscal deficit was not real and in fact was ‘fudged’, and the actual deficit was much more than that. This work was done more by rigging of data and forced public sector undertakings to give dividends in advance.

In such a situation, there was a challenge before the NDA government’s finance minister, Arun Jaitley, to keep fiscal deficit under limits. Jaitley accepted that challenge and kept that year’s fiscal deficit at 4.1 per cent of GDP, in line with Chidambaram’s interim budget, in the 2014-15 full budget (which was presented in July 2014). Thereafter, the NDA government steadily reduced the fiscal deficit to 3.9, 3.5, 3.2 and 3.3 percent of GDP in the years 2015-16, 2016-17, 2017-18 and 2018-19, respectively.

It is notable that under the UPA government, especially UPA-2, by 2011-12, the fiscal deficit had reached 5.7 per cent of GDP. The effect was that inflation reached double digits (nearly 13 per cent) in the terminal years the UPA regime.

The effect of curbing the deficit was that prices started to come under control and it is seen that inflation continued to fall during the Modi era and the consumer inflation reached 3.4 percent by 2018-19. This was an encouraging sign for the economy as it paved the way for lowering of interest rates.

It is important to note that the policy interest rates are supposed to be directly related to inflation. RBI reduces interest rates when inflation is low. Decrease in the interest rate encourages investment as borrowing cost comes down. On the other hand, borrowing for homes, cars and other consumer goods becomes cheaper and EMI comes down. This increases demand in the economy.

Not only this, people’s well-being improves because of cooling off of inflation. It can be said that in the first five years of the Modi government, on the one hand, prices remained under control; on the other hand GDP growth was also better.

Worries of Declining Revenues

Since it is estimated that the fiscal deficit for the year 2019-20, which was estimated to be only 3.4 percent, may touch 4.7 percent, it is being speculated that this may also fire inflation. At the same time, the country is constantly struggling with slowing down of growth.

At the beginning of the year, the expected growth was being estimated around 7 percent. Later, expectations were reduced to nearly 5 percent. In such a situation, the possibilities of reduction in the policy interest rate are also receding. This may dampen the hopes of increase in investment, housing and consumer demand.

In such a situation, while presenting the budget for the year 2020-21, the challenge before Sitharaman would be to keep the treasury in balance and keep the fiscal deficit in limits.

It is clear that due to slowdown, the receipt of direct and indirect taxes is less than expected, and at the same time revenue, will be reduced due to reduction in the rate of corporate tax announced recently. On the other hand, the GST recovery is also falling short of expectations, which is causing double loss to the central government.

While the central government’s own revenue is decreasing, it also has to compensate the states for shortfall in their receipts. Significantly, in 2019-20, it will have to compensate states much more than ever before. According to the Investment Information and Credit Rating Agency (ICRA), for the big nine states only, this amount of compensation may double to Rs 70,000 crore, as compared to only Rs 35,000 crore last year. Apart from this, if the amount is added to compensation of other states, then the situation looks even more severe for the central government.

What to do?

Today, while corporate business is growing, corporate tax receipts are not increasing. The reason for this is that tech companies, e-commerce companies and large foreign software companies avoid paying taxes. It is well known that the retail business of the country is constantly going into the hands of big foreign e-commerce giants. Similarly, large corporate aggregators have also come in the field of travel, taxi services etc.

In fact, these companies are capturing the market and data by giving discounts on the strength of their deep pockets. This is making them gain valuation, while in their profit and loss account, they continue to show huge losses. This means that promoters are benefiting hugely in terms of valuations of their businesses, but these companies are avoiding paying tax.

Experts are constantly suggesting that such companies should be taxed by levying a minimum alternate tax based on the volume of their business. We have to understand that the government treasury has been suffering due to this for a long time. Such concern is being expressed not only in India, but all over the world.

Efforts have started in this regard in The Organisation for Economic Co-operation and Development (OECD) countries and France has taken the lead. India will also have to think about this. Only then will the shortfall in government revenue can be compensated.

Sigh of Relief

News of picking of growth in October to December quarter (as per newspaper reports based on report of The Economist’s Intelligence Unit) must have given a sigh of relief to the FM, that now she can project a higher growth in revenue to ride on the bigger budget targets in the next fiscal.


Please enter your comment!
Please enter your name here

Most Popular

Actor Akshat Utkarsh Found Dead At Mumbai Home, Police Suspect Suicide

The 26-year-old was found dead in his room by his woman friend who shared the flat with him on late Sunday night, said an...

Vice President Venkaiah Naidu tests Covid-19 positive, he is asymptomatic

(adsbygoogle = window.adsbygoogle || ).push({}); Vice President Venkaiah Naidu, 71, announced on Tuesday evening that he has been...

UP Woman, Gang-Raped And Tortured 2 Weeks Ago, Dies In Delhi Hospital

(adsbygoogle = window.adsbygoogle || ).push({}); Injuries to her neck had left her paralysed and struggling to breathe, said...

Joe Biden Calls Trump A “Clown” During US Presidential Debate

(adsbygoogle = window.adsbygoogle || ).push({}); "It's hard to get any word in with this clown -- excuse me,...

Recent Comments