Context

The Budget was a workmanlike exercise, more a statement of account, around which was woven many strands of intent and vision, which, read in its entirety and by connecting interlocking dots, framed a strategy of moving towards a $5 trillion economy over the next five years.

Fiscal arithmetic of the Budget

• A clearer picture of off-balance-sheet borrowings: To a large extent, the Budget has done this, giving a much clearer picture of the off-balance-sheet borrowings, which add to the government’s debt and its obligations to pay.
  • Increasing the credibility of government: This move will enhance credibility among the investor community while taking decisions on committing capital for India’s future.
• Possibility of nominal 10 % growth: The nominal growth projected for 2020-21 at 10 per cent is feasible, with a stretch, given the expected rise in inflation, which will add around 4 per cent to a projected 6 per cent real growth.
  • Aggressive revenue projection: The revenue projections are more aggressive, assuming a buoyancy which can be attributed in large measure to checking evasion using data analytics.
• Disinvestment and privatisation revenue: The major boost to revenues is expected from disinvestment and privatisation of central public sector enterprises, together with asset monetisation.
  • The target is up sharply to Rs 2.25 lakh crore.
  • This initiative has been one of the core focus areas of the government, has to be lauded for-
  • The effects of increasing efficiency in operations and-
  • Restricting the losses to the public balance sheet.
  • Disinvestment revenues are likely to be augmented with higher dividend receipts, including, from higher profits of the Reserve Bank of India.
• Optical allocation by the Govt.: Spending, which depends on revenue collection, has also been optimally allocated, with capital expenditure budgeted to increase faster than revenue.
  • High revenue expenditure: Capital expenditure is still a much smaller fraction of total expenditure compared to the committed revenue spending on interest payments, salaries and pensions and subsidies.

The slowdown in the economy and squeeze in the credit flow

• Three aspects of the current slowdown that makes it different
• First– Multiple engines of growth have synchronously decelerated-
  • Consumption, investment, exports and sporadically, government spending — compared to earlier ones when one or some of these drivers were still functioning
• Second- Demand led slowdown:
  • This is more a demand-led slowdown, versus the earlier ones, which tended to originate with a supply shock, whether from oil or foreign capital.
• Third– the trigger for this episode was a financial shock-
  • NBFC lending — which tipped the weaknesses building in the system into deep deceleration.
• Squeeze in the credit flow of the banks
  • Drastic reduction in credit flows: A telling statistic released by the RBI shows that compared to Rs 8 lakh crore of loans provided to borrowers during April-September 2018, credit flow fell to Rs 90,000 crore in the six months of 2019.
  • MSMEs worst affected by the credit squeeze: Bank credit has continued to remain very weak. In the context of the broader slowdown, credit to micro, small and medium enterprises (MSMEs) has been one of the worst affected.

Whether the slowdown is more cyclical or structural-conundrum for policymakers

• If it is more cyclical, aggressive use of monetary and fiscal counter-cyclical policy could yield the desired result.
  • If not, then the wait is likely to be longer and will involve more sector-specific de-bottlenecking initiatives.
• Signs of structural constraints: While there is certainly a cyclical component in the manufacturing segment- the proximate source of the slowdown- there are signs of deeper structural constraints.
• Quintuple problem– This problem has now expanded into almost quintuple problems, encompassing the government, households, NBFCs along with the banks.
  • Overlaid on these structural impediments is a sharp weakening of consumer, investor and corporate confidence.

Conclusion

Implementation, as always, will be key to achieving the $5-trillion goal. The arena for the next set of reforms and actions for sustained growth is at the state level: Agriculture, land, electricity, and even labour. The Budget acknowledges this. A federal approach to tackling the slowdown, in a coordinated fashion, will probably be the most effective.

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