MY KOLKATA EDUGRAPH
ADVERTISEMENT
Regular-article-logo Tuesday, 23 July 2024

Reality check on deficit missing

With the economy on a slow recovery, the government may struggle to balance its books

Koushik Chatterjee Published 01.02.20, 09:01 PM
The Sensex tumbled almost 1000 points after the budget was presented

The Sensex tumbled almost 1000 points after the budget was presented (iStock)

This year’s budget was presented in the backdrop of one of the most challenging economic conditions in the country’s recent history. While India has faced many challenges in the past, not much memory exists in the minds of the current generation of the economic crisis the country faced in 1991.

Knowing fully well that this time India has not been able to de-couple itself from the global slowdown due to its internal issues and there is very little fiscal headroom available to the government, yet there were expectations of a growth-focused budget that would trigger the demand cycle.

ADVERTISEMENT

The fiscal slippage to 3.8 per cent was not at all surprising and to kick start the economy I felt the FM could have asked for a two-to three-year hiatus from the FRBM Act rather than being optimistic of being able to bring it on track next year to 3.5 per cent.

With the economy on a slow recovery, the government may struggle to balance its books if the planned PSU divestment doesn’t come through in a time-bound manner. The big announcement of the IPO of LIC is possibly the insurance in case the PSU divestments do not fetch the target value!

The finance minister, in her rather long speech, liberally and carefully used inclusive language such as the budget is meant for the business, youth, women, minorities, SC&ST, wealth creators etc and that the government’s taxation philosophy is to be fair and trusting.

I felt this was a conscious effort of outreach to the important stakeholders of the society as trust and confidence in governance are critical and has huge trade-off benefits on the economy, especially investments.

Another noticeable aspect was the emphasis on wealth creators because wealth creation as an aspirational economic objective is good for the society and provides more options to the government to tackle the problem of social and economic inequality.

So were the general expectations met by the budget? The immediate reaction of the stock market with the Sensex tumbling almost 1000 points suggests no. But that might be an immediate reaction and there are multiple geoeconomic factors that impact the capital market’s performance.

Taxpayers’ relief

There is a serious tax reform initiative proposed with an attempt to give some relief to the large number of lower income taxpayers with the hope that they would be spending the money on consumption and investments which in turn would boost the demand cycle.

This is a calculated move but withdrawing of all the deductions at one go could have been avoided as many of the deductions incentivise the taxpayers towards personal savings.

Also there is a cap introduced on the employer contribution to the retiral funds such as provident fund and interest on retiral funds from employer contribution has been made taxable.

This would be very harsh on a large number of salaried professionals across the country where there is no social security system

Thematically, the budget continued its focus on allocating capital towards building the physical and skill infrastructure, including the national pipeline grid, water for all mission, airports and inland waterways, medical colleges andagri and digital infrastructure.

This is absolutely critical for India to improve its global competitiveness and it is the right thing to do.

The finance minister also mentioned several times that the funding for many of these projects will be on a public-private partnership, confirming the lack of funding capability by the government.

If the government can get the financing structure right and kick start the projects quickly, it could be a big opportunity for employment in the coming years.

Koushik Chatterjee is executive director and CFO, Tata Steel

Follow us on:
ADVERTISEMENT