Budget emphasizes more on consumption than investment: Sujan Hajra

By Mr. Sujan Hajra

Little respite

The Union Budget FY21 once again tried to do a balancing job between boosting growth and containing deficit. The emphasis seems to have been more on fiscal prudence. Also, on the balance, the budget is focused more towards promotion of consumption than investment/ savings. Despite caution on deficit, the budget numbers do not look totally kosher raising possibilities of fiscal slippage. The impact of the budget on financial savings in general and equity and debt markets in particular, seem to be negative.

A cautious budget

If one was expecting big growth boosting measures from the Union Budget 2020, it did not materialised. Despite considerable focus of the budget speech on infrastructure, rural development, health and education, in terms fund allocation and concrete near-term measure, there have not been many big changes. The major reason for the Budget not having big-bang announcements is strong attempt by the government to avoid large fiscal slippage. Fiscal deficit to GDP number has been brought down by 30 bps between FY20 and FY21 to 3.5%.

Attempts to build confidence

More than the slowdown of growth, the bigger concern on the Indian economy currently is lack of business, consumer and investor confidence. With measures such as increase in limit for insured bank deposit, steps to guard against harassment by tax authorities and options to settle outstanding direct tax disputes without paying penalties/interest, the budget has tried create an environment of trust. Whether the measures taken would meet the objective, however, is another issue.

Efforts to boost investment

The cut in corporate tax rate in Sep’19 was a major move to attract investment. The Budget has made additional efforts to accelerate investment through cross border inflows. The special dispensations to sovereign wealth fund, removal of dividend distribution tax, etc. are examples of this. Funding access and customs duties have also been used to help domestic industries especially the MSME sector. Yet, without major acceleration of allocation of public investment or significant incentive to private investment in the budget, marked acceleration of investment in the near future looks unlikely.

More focus on boosting consumption

There have been numerous announcements to raise farmers’ income and rural development. Allocation of funds under these heads, however, not impressive. Despite these, the clear focus of the budget including the reduction of the tax rates personal income, seem to be towards boosting consumption.Measures to support demand, impact on financial savings. Rejig in personal income tax regime with estimated revenue foregone is of Rs.400 billion is a step to boost consumption of the middle class. Yet, for taking the benefits of the lower tax rates, the tax payer has to forgo the existing deductions. This can negatively impact household financial savings in equity, small savings and insurance schemes.

More focus on future than the present

While the Budget has not provided many concrete measures to boost the near-term growth, dispensations provided to start-ups and new technology initiatives can have longer-term positive impact. Several receipt items look stretched. Divestment of Rs.2,100 billion in FY21 vs. Rs.650 billion in FY20 looks ambitious. The number for FY21 seems to have built-in considerable amounts (around Rs1 trillion) from the proposed IPO of LIC. The high dividend transfer (Rs.2,000 billion) in FY20 was inter alia due to transfer of reserves from the RBI. Seen from this perspective, the dividend number of Rs.1,554 billion in FY21 look ambitious. In view of the sharp cut in corporate tax rate in Sep’19 and modest cut in personal income tax rates in the budget, 11.5% growth in corporate, 14% growth in personal income tax and 13% growth in GST look ambitious. In contrast, allocation for several major spending heads like defence, major subsidies, home affairs and rural development look conservative.

Deficit and debt market impact

The market borrowing amount for FY20 has been raised by Rs.500 billion from the budgeted number and for FY21, the number has been further increased by Rs.370 billion. Barring considerable OMO by the RBI, the sharp increase in market borrowing can harden long-term bond yield considerable. In addition, funding of fiscal deficit assumes Rs.2.4 trillion contribution from small savings in FY21 (same as the revised number for FY20). Much of the small savings schemes are subscribed by households to avail income tax benefits. If households move towards the new income tax regime, collections under small savings schemes can come down substantially. Consequently, additional market borrowing would be required to fund the short-fall. These are negative for the debt market. Certain other measures, especially enhanced access of FPIs to the Indian bond market and taxation issues, however, can counter-balance part of the negative impacts highlighted above.

Negative for equity market

The lack of major growth boosting measures in itself is negative for the equity market. The new income tax regime would also be negative for tax exempt equity savings schemes. Recasting of dividend taxation norms also seem to be on the balance negative for most domestic equity investors. Overall, the budget seem to be negative for the equity market.

(The writer is the Chief Economist and Executive Director of Anand Rathi Shares & Stock Brokers)