What the Budget achieved
What the Budget achieved

What the Budget achieved

The Budget 2020 made sincere attempts to balance a number of objective functions like fueling the rising expectations of budgetary support for the much needed infrastructure but not at the cost of pulling out of welfare programmes for the poor and not increasing the fiscal deficit such that it would not crowd out private investment; competition for funds in an otherwise tight liquidity condition would leave both the sides raising the cost of funds, which would be the worst thing to happen.

When we analyse the budget, we would infer that almost all of these expectations are so inter-connected that it is like chasing a rabbit. First of all, the high expectation on higher govt spending for infrastructure was already created by report on infrastructure which got kicked off on December 31 with an announcement of Rs 103 trillion to be invested over the next five years in NIP; the vision document showed a 40 per cent budgetary support, the 2020 budget provided Rs 22,000 crore to the NIP as an initial investment.

Fiscal deficit is an important area to look at and in the last four years from 2016-17 to 2020-21, the total fiscal deficit is growing at a CAGR of 11 per cent, for 2020-21 the growth is being projected at 4 per cent, which is setting the tone for efficient government spend. The two largest components through which the government funds the total fiscal deficit is from net market borrowings (64 per cent), which is showing an uptick of 3 per cent over last year and small savings (30 per cent) which is showing a slight decline. The point to note however is that is that over the last four years, the small savings borrowings have zoomed from 17.5 per cent to 30 per cent.

Small savings schemes under NSSF forms the backbone of the Government borrowings under small savings, which gets invested in the Central and State Government special securities.

The alternate tax schemes proposed has in fact dis-incentivised the tax payer to put money into small savings for purposes of tax savings, something that would augur expansion of the net market borrowings to fuel the fiscal deficit. Will it not lead to higher interest for loan-able funds especially when RBI monetary policy talks about stabilising the interest rates to keep inflation in check? Indeed the average cost of borrowings for the Government projected for 2020-21 shows an increase from 6.54 per cent to 6.75 per cent.

But the real surprise is the rising extra budgetary resources used to further support the budget, which has been growing in the last four years from Rs 0.79 lakh crore to Rs 1.86 lakh crore at a CAGR of 23 per cent. This is also the reason why average cost of borrowing is rising and the actual fiscal deficit must include the extra budgetary resources used, which is exogenous, that would make the fiscal deficit look more like 4.3 per cent instead of 3.5 per cent, if included.

The Budget expectations also included special attention to the two sectors, agriculture, which would generate demand and the real estate sector, which is reeling under very tight liquidity conditions. Agriculture should not been seen as a budgetary allocation programme, but more in terms of setting directions on how farm credit would be expanded and how MSP could create value to the farmer. The government announced sixteen schemes in both these directions. After the budget RBI made policy announcements on the Real estate sector by extending the date of commencement of commercial operations of project loans for commercial real estate which have been delayed for "reasons beyond the control of promoters" by another one year without downgrading the asset. This is a welcome step. That the high expectations were out of sync with the rest of the available evidence in the budget was clear in the Sensex taking a momentary dysfunctional view on the day of the budget.

ABOUT THE AUTHOR: Procyon Mukherjee works as Chief Procurement Officer at LafargeHolcim India. The ideas presented are his personal and have no connection to the beliefs of the company where he works.

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