Budget 2019 may be high only on promise

A short, crisp and restricted interim Budget, but demands aplenty! It will be interesting to see how much the finance minister can stretch himself, given that largesse can put undue pressure on the fisc and may be unsustainable for any government that comes after general elections.

Among the demands that are being made is a big income tax relief to the salaried class to a two-fold hike in allocation for food subsidies, farm sector doles and measures to uplift market sentiments which can allow growth and development of tepid automobile industry.

While, industry chamber Confederation of Indian Industry (CII) has proposed that the central government grant exemption to people earning up to Rs 5 lakh per annum, there are other organisations demanding a bigger rebate. But whether any of these announcements mean anything for people is anybody’s guess. The government, which has been promising the benefits, has no power to implement any of them. At the fag end of the tenure, any announcement is high only on optics.

While the Federation of Indian Chambers of Commerce and Industry (FICCI) said it wanted corporate tax rate cut on the lines of the US among other things, its counterpart CII suggested the government to bring back the Income Tax exemptions for reimbursement of medical expenses and transport allowance along with the standard deduction of Rs 40,000 in 2019.

Businesses today are faced with high tax cost leading to increased cost of production and resultant lower surplus for reinvestment and expansion. The basic corporate tax rate of 30% coupled with dividend distribution tax rate of 20% makes the effective tax cost for an Indian company too high, rued FICCI as it said the reduction in corporate tax rate had been limited only to companies with a certain turnover.

The historic tax reform legislated by the US, however, has cut the corporate tax rate from a top rate of 35% to 21%.

Businesses believe that the move has made the United States more competitive in attracting foreign investment, technology, and other areas.

Besides, CII also proposed to remove taxability of Contribution by Employer to superannuation fund under Section 17 in line with the taxability of contribution by Employer to Provident Funds. The CII said that this would avoid double taxation.

Budget size

It is not clear what will be the shape of the interim Budget, but the government has given enough indications that it would go much beyond the limits of pre-election year Vote-on-Account. Union Minister Arun Jaitley, earlier this month, stated that the interim Budget will be within the existing conventions. However, its contents will be dictated by economic compulsions and realities of the day.

Rating agencies played with optimum cautiousness. “Although, there is no restriction on the government to bring about changes in taxes and announce schemes or make allocations; normally, governments avoid making these in the interim Budget. Media reports have, however, quoted the finance minister stating that this will not preclude the possibility of bringing in measures that are absolutely essential,” Care Ratings said in its report.

It said infrastructure sectors such as rail, road and coal sectors should be given preference and expected allocation to infrastructure sector similar to Budget 2018.

The government, however, has so far not signalled any package for the infrastructure sector in the Budget to be presented on Friday (February 1). It has given enough hints about farmers, startups, women, youth and middle class will be taken care of.

Rising fiscal deficit

The immediate consequences of such largesse could be a blow to fiscal deficit, which the rating agencies said could go up by a percentage point or two. However, the government is confident it would not breach the target. Not only Arun Jaitley but also finance ministry officials have told until recently that the target of 3.3% is sacrosanct. According to the medium-term framework of the government, the Centre should aim at achieving a 3.1% fiscal deficit for 2019-20.

Moody’s Investors Service said steps announced by the government to aid MSMEs and the measures being planned to support farmers will increase the risk of fiscal slippage and push fiscal deficit to 3.4% of GDP in the current financial year.

According to India Ratings and Research (Ind-Ra), the fiscal deficit may widen by 70 basis points in the fiscal year 2019-20 if the government decides to roll out a relief package for small and marginal farmers.

The government’s own policy advisers have warned too, albeit a bit late. Just when the interim budget is around the corner, the Economic Advisory Council to the Prime Minister (EAC-PM) cautioned the government against deviating from its fiscal consolidation target.

The Council issued a statement to warn the government against any such measures. This came after Minister of State for Agriculture Parshottam Rupala said the government would soon announce a package for farmers to boost their income.

The government had budgeted the fiscal deficit for the current financial year at 3.3% of the gross domestic product (GDP). However, in the April-November period, the deficit touched 115% of the budget estimates.

The insiders of finance ministry are of the view that the government has various methods to hide the fiscal deficit under the carpet if it decides that 3.3% number is sacrosanct. There is a possibility that the finance ministry may roll over certain subsidies like food and fertiliser to the next year just to show a clean fiscal deficit number.

It has happened in the past during the former finance minister P Chidambaram’s regime and the current dispensation may take a cue from that. But this kind of a measure will put unavoidable pressure on the government that takes over after the General Elections. It will fan inflation and put a tight leash on the Reserve Bank of India in its effort to keep interest rates under a check.

The net gain of all these doles may not be anything in favour of the outgoing government. The UPA, in its interim budget, had announced an across the board excise relief to the capital goods sector, automobiles and even certain services. That neither turned around the fortunes of industry nor of the outgoing dispensation. The UPA was handed out an unimaginable defeat in 2014 and Congress’ seats were reduced to a meagre 44 from 206.

The BJP, which came with a massive majority of 282, has recently tasted defeat in three major Hindi heartland states of Rajasthan, Chattisgarh and Madhya Pradesh.

Those elections were considered a prelude to the upcoming Parliamentary polls. Political analysts are of the view that BJP too will go far beyond its means just to woo voters but they may not have any ultimate gain.​