The interim budget for 2019-20 comes against the backdrop of significant distress in rural India, strained government finances, weakness in the rupee, liquidity and funding constraints for businesses -- especially for small and medium enterprises, and the electoral losses in key state elections for the ruling party. As a consequence of these concerns and constraints, the government can make announcements and undertakes measures in the budget that could appease various sections of society right from farmers to small businesses, from the middle class to corporates.
Even as there may be no restriction on the government to bring about changes in taxes, announce schemes or make spending allocations, as per convention, governments usually do not make these decisions in the interim budgets. It is usually restricted to the ‘vote-on-account’ to enable the government meet its expenditure for the 3-4 months, till the new government assumes office. However, this time around, the government is likely to deviate from the norm. It has given hints that a relief package for farmers could be announced in the interim budget. This has deepened concerns over the central government’s finances and its commitment to fiscal prudence.
The government finances in this fiscal year has been strained with income for the first 8 months of the year falling behind estimates and the fiscal deficit having surpassed the whole year target. This has raised the likelihood of the government’s inability to adhere to its stated fiscal discipline path -- of limiting its fiscal deficit to 3.3% of GDP in 2018-19. This budget would provide crucial insights and assessment on the overall financial position of the government for the current year, which would have set the tone for the coming financial year. It will also tell us whether the government would pursue the fiscal consolidation or spending discipline based on the amendments of the Fiscal Responsibility and Budget Management (FRBM) Rules -- of bringing down the fiscal deficit to 3.1% of GDP in 2019-20.
There is increasing talk that the government may introduce the concept of Universal Basic Income (UBI) for all individuals below a certain income level by subsuming various centrally sponsored schemes and subsidies. Given the complexities and scale, it is unlikely that subsidies would be subsumed all together. The interim budget could include a roadmap for the same.
The budget could provide relief to income tax payers by way of increase in basic exemption limits and investment limit in tax saving instruments and schemes. On the corporate tax front it could include a roadmap for lowering the rates for all corporates.
The relief and other measures are likely to find place in the interim budget, and would raise overall expenditure and consequently result in widening of the fiscal deficit above the consolidation path target. A 10% increase in expenditure in 2019-20 over the preceding year could potentially take the fiscal deficit to 3.5% of GDP, above the 3.1% target set by the FRBM. A relaxation in the fiscal consolidation target is thus on cards.
(The writer is a senior economist at Care Ratings. Views expressed are personal)