Taking of experts: FM did its best within a limited fiscal space

NEW DELHI: as the first budget submitted by a finance minister who had that exclusive portfolio, it was historic. Since this was also the first budget of a government that came after a renewed electoral mandate, there were high expectations. Would corporate tax be reduced? Would the consumption increase? But these expectations were mitigated by the fact that the fiscal room for maneuver was very limited.

The budget was prepared in the context of a slowing economy and growing concern about unemployment. The fiscal space was also limited by the fact that the financial savings of households are barely 10% of GDP and the aggregate government debt and several entities of the public sector is also 10%.

The collection of taxes during 2018-19 did not reach the objective, and the fiscal deficit remained under control only by cutting some capital expenditures. Since economic growth has not improved yet, tax collections next year can not be very dynamic. Nor are other methods for a strong stimulus, such as a sharp cut in tax rates or radical labor reforms, easy to implement. To some extent, the FM opted to reduce dependence on internal loans by announcing that the government can borrow from abroad. It is a bold move, but it exposes the government's finances to foreign exchange risk.

The Budget has also increased dependence on the dividend paid by the Reserve Bank of India and disinvestment product. Taxes on the super rich have gone up.

The reactivation of private investment requires, among other things, greater confidence in the general economic outlook, the growth of demand and the availability of cheaper credit. To some extent we saw some growth capital to be injected, in the form of capital of Rs 70,000 crore, into the banks of the public sector. That will allow a greater flow of credit. There was also a credit enhancement through a guarantee, to ensure that non-bank financial companies also obtain some financing. All this will help to a certain extent.

There is also an agglomeration in effect of a hugely greater expenditure in connectivity, roads, national gas and electricity networks and waterways and seaports. Part of this investment will use the new financing through a transit process, but much will depend on private sector financing. The finance minister placed great emphasis on the inclusive aspect of growth, especially in social sector spending.

-- By

Ajit Ranade, chief economist, Aditya Birla Group

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