The Interim Budget 2019-20, while encapsulating all that the present government has done in its tenure, has introduced a slew of measures aimed at farmers, rural population, middle class/salaried class and underprivileged through various schemes and increased allocation of money. There is a big fillip for affordable housing. The Budget has broadly imparted a vision on a ten year horizon laying the basis for a regular budget that is likely to come up during July 2019.
Fiscal arithmetic of FY20 is largely dependent upon FY19 numbers. Given the trends in revenue and expenditure till Dec, the FY20 numbers look aggressive. For FY20, gross borrowing is projected at Rs 7.1 lakh crore and net borrowing at Rs 4.73 lakh crore. For FY19, an additional borrowing of Rs 19,000 crore is envisaged. For FY20, extra budgetary resources for PSUs has also been budgeted at Rs 3.97 lakh crore. Though lower than Rs 4.46 lakh crore in FY19, it is still substantial. The issuance of securities against small savings has also been increased to Rs 1.25 lakh crore for FY19 as against the budgeted Rs 75,000 crore (FY20 at Rs 1.30 lakh crore).
India will be the first country in the world that will be providing some sort of direct income transfer to more than 12 crore farmers which is 40,000 times higher than the average number of beneficiaries benefited in those countries which have implemented such cash transfer schemes. The government has also proposed a mega pension scheme for 10 crore labourers and workers in the unorganised sector.
Individual taxpayers having taxable annual income up to Rs 5 lakh will not be required to pay any income tax. All tax payers will save on an average Rs 3,000 per annum in taxes. The TDS limit on interest earned on bank deposits has been increased to Rs 40,000 from Rs 10,000 currently. This will incentivise investors to invest in bank deposits.
Fiscal arithmetic of FY20 is largely dependent upon FY19 numbers. Given the trends in revenue and expenditure till Nov, the FY20 numbers look aggressive. Deviating from fiscal consolidation path, fiscal deficit for FY19 and FY20 is pegged at 3.4 per cent of GDP. The slippage in fiscal deficit is primarily attributed to allocation of funds to the farmers: Rs 20,000 crore is proposed in FY19 and Rs 75,000 crore in FY20 for PM-KISAN. In actual terms, fiscal deficit for FY20 is Rs 69,600 crore more than the FY19 revised number. The Budget estimates 11.5 per cent nominal GDP growth rate for FY20 (same as the previous year). Assuming 7 per cent real GDP growth rate, this translates into an inflation of around 4.5 per cent, which is reasonable.
Gross tax revenue is expected to grow by 13.5 per cent in FY20 to Rs 25.5 lakh crore. This revenue target from taxation is supported by 13.3 per cent growth in corporation tax and 17.2 per cent rise in income tax from direct tax side. We believe that FY20 GST numbers at Rs 7.6 lakh crore (Rs 63,433 crore per month) compared to Rs 6.4 lakh crore, is achievable as GST process is stabilizing. The Government is expecting more compliance and hence better collection in FY19.
Even if we a make a modest shortfall in gross tax revenue shortfall of 10 per cent in FY19, it will translate into gross tax revenue growth rate of 26.1 per cent in FY20. If there is a 5 per cent shortfall, this growth rate becomes 19.5 per cent. If we look at the decadal CAGR in FY10-19, it is 15.3 per cent. For the sake of next year’s revenue projection fulfillment, it is necessary that this year’s target are not missed.
Disinvestment target for FY20 is budgeted at Rs 90,000 crore which is Rs,10,000 crore more than the FY19 revised estimate. We believe that government will be able to achieve this target given that it has approvals for a list of companies for public offerings both through initial and follow on public offers. Major subsidies will increase by a whopping 11.4 per cent to Rs 2.97 lakh crore.
The Interim Budget, while encapsulating all that the present government has done in its tenure, has introduced a slew of measures aimed at farmers, rural population, middle class/salaried class and underprivileged through various schemes and increased allocation of money. There is a big fillip for housing.
Providing direct income support at the rate of Rs 6,000 per year to farmer families (around 12 crore small & marginal farmers), having cultivable land upto 2 hectares is a good beginning. Providing 2 per cent interest subvention to the farmers pursuing the activities of animal husbandry and fisheries, who avail loan through kisan credit card and an additional 3 per cent interest subvention in case of timely repayment of loan will reduce the interest burden on poor farmers
Individual taxpayers having taxable annual income up to Rs 5 lakh will not be required to pay any income tax. Around 30 million taxpayers will benefit from this with a cost of Rs 18,500 crore to the exchequer. For salaried persons, standard deduction is being raised from the current Rs 40,000 to Rs 50,000. This will provide additional tax benefit of Rs 4,700 crore to more than three crore salary earners and pensioners on an average of around Rs 3,000 per person.
One of the most remarkable and long-pending demand that has been met in this Budget is the increase of TDS threshold limit on interest earned on bank/post office deposits from Rs 10,000 to Rs 40,000. As of Mar’18 there were 239 million term deposit accounts in banks with per account balance at Rs 2.75 lakh. Assuming 7.5 per cent rate of interest, on an average every term-deposit holder accrued interest of Rs 20,000, out of which he/she has to pay TDS on Rs 10,000. Now that interest earned upto Rs 40,000 is exempted this will bring large relief to all the small depositors and they may deposit upto Rs 5 lakh in term deposits. Banks may see surge in term deposits going forward.
Total gross market borrowings of the government is projected at Rs 5.71 lakh crore in FY19 (BE of Rs 6.05 lakh crore). However, after taking into account repayments of Rs 1.48 lakh crore (adjusting for switch of Rs 17,000 crore) net borrowings is estimated at Rs 4.22 lakh crore. For FY20, gross borrowing is projected at Rs 7.1 lakh crore and net borrowing at Rs 4.73 lakh crore (after adjusting for switch and buyback of Rs 50,000 each). To subscribe to this government borrowing programme in the absence of matching demand, the yields may see an uptick, as witnessed today.
A higher borrowing can be matched only in a scenario where the NDTL of the banks go up leading to increased SLR requirements, which can be met through purchase of G-Secs. The catch in this, however, would be the latest decision of revising the TDS exemption which in an ideal scenario should bring depositors back to the banks. The depositor will exercise option based on the trade-off between the deposit rates and the benefits out of TDS exemption.
The total dividend from the Reserve Bank of India, nationalised banks and financial institutions is estimated around Rs 82,911 for FY20, slightly higher than the revised estimated of FY19 (Rs 74,140 crores). For FY19, government has revised upwards its estimation from Rs 54,817 crore to Rs 74,140 crores due to better financial positions of banks post Q3. For FY20, we believe that government will manage to get the estimated amount as implementation of IBC, relaxation in PCA and better economic growth will prop up banks’ bottom line.
People working under the informal sector have been duly acknowledged with a mega pension yojana namely ‘Pradhan Mantri Shram-Yogi Maandhan’ for the unorganised sector workers with monthly income upto Rs 15,000. This pension yojana shall provide them an assured monthly pension of Rs 3,000 from the age of 60 years on a monthly contribution of a small affordable amount during their working age. The government will deposit equal matching share in the pension account of the worker every month.
Some next gen steps like a national programme on ‘Artificial Intelligence’, making 1 lakh villages into digital villages over next five years, technology intensive project to transform the income-tax department into a more assessee-friendly one with 24 clearance window also provide the momentum to an India which is technology driven and efficient.
Fiscal management: the genesis of fiscal maths for fy19 and fy20
Deviating from fiscal consolidation path, fiscal deficit for FY19 and FY20 is pegged at 3.4 per cent of GDP. The slippage in fiscal deficit is primarily attributed to allocation of funds to the farmers. The Budget estimates 11.5 per cent nominal GDP growth rate for FY20 (same as the previous year). Assuming a 7.5 per cent real GDP growth rate, this translates into an inflation of around 4.0 per cent. This seems to be quite realistic.
However, what does not appear very realistic is the FY19 tax revenue projections, despite their downward revision, if we go by the actual collections. The tax revenue projections have been revised downward by Rs 23067 crore, due to reduction in CGST collection by Rs 1.00 lakh crore. Some compensation in tax revenue shortfall is sought from increased projection of corporation and customs tax. However, going by the data from CGA, even the revised projections seem to be bordering on the aggressive side. For example, corporation tax actual collection till Nov’18 is around 43 per cent of the revised annual estimates. For GST also the, despite the reduced estimates, the target appears optimistic (60 per cent of the Revised estimates achieved till Nov’18). How much IGST has the Centre kept and how much it is going to allocate to states will only be clear after March.
Fiscal arithmetic of FY20 is largely dependent upon FY19 numbers. Since FY19 numbers are optimistic given the trends in revenue and expenditure till Dec, the FY20 numbers look reasonable. However, once the numbers for FY19 are revised downward, the FY20 projections will swell. Even if we are looking at a gross tax revenue shortfall, of 10 per cent in FY19, it will translate into gross tax revenue growth rate of 26.1 per cent in FY20. If there is 5 per cent shortfall this growth rate becomes 19.5 per cent. If we look at the Decadal CAGR in FY10-19, it is 15.3 per cent. For the sake of next year’s revenue projection fulfillment, it is necessary that this year’s target are not missed.
Government borrowing & disinvestment
As against the budgeted estimate of Rs 6.05 lakh crore, total gross market borrowings of the government is projected at Rs 5.71 lakh crore in FY19. The government has reduced the borrowing target by a whopping Rs 70,000 crore for FY19 in Sep’18, thereby reducing the estimate to Rs 5.35 lakh crore. However, the revised estimate for FY19 is again raised by Rs 36,000 crore. Net borrowing is Rs 4.73 lakh crore in FY19 as against Rs 4.50 lakh crore in FY18, after taking into account a switch of Rs 17000 crore in FY19. Thus it implies there is an effective addition of Rs 19,000 crore from the FY19BE. Meanwhile, the short-term borrowing is now estimated at Rs 25,000 crore as against the budgeted Rs 17,000 crore.
For FY20, the government borrowing is budgeted at Rs 7.10 lakh crore and the net borrowing requirement is pegged at Rs 4.73 lakh crore taking into account repayments of Rs 2.36 lakh crore (with switch of Rs 50,000 and buyback of Rs 50,000 crore). Notably, the government stocks repurchased by means of switch/buyback will not have any impact on the fiscal situation as they will get prematurely redeemed and interest will cease to accrue on such redeemed government stocks. Furthermore, the government has budgeted Rs 25,000 crore short-term borrowings through various (91-day Rs 21000 crore, 182 day Rs 2049 crore, 364 day Rs 1948 crore) treasury bills.
Financing through small savings
Apart from the market borrowings, the government has also dipped into small saving scheme to meet a part of its expenditure. The issuance of securities against small savings has also been increased to Rs 1.25 lakh crore for FY19 as against the budgeted Rs 75,000 crore which was later increased to Rs 1.00 lakh crore. So far only Rs 45,396 crore has been raised through small savings during Apr’18-Nov’18. Thus the additional amount of Rs 79,604 crore will have to be raised in the remaining five months of this fiscal. Coupled with Rs 19,000 crore additional market borrowing, this will put pressure on yields in coming months.
Increasing use of Extra Budgetary Resources (EBR)
Of late, the government has been increasingly using the off-balance sheet measures to finance its expenditure, both revenue as well as capital. As per the CAG report on compliance of the fiscal responsibility and budget management act, 2003 for the year 2016-17, off-balance sheet financing is used for deferring fertilizer arrears/bills through special banking arrangements; food subsidy bills/arrears of FCI through borrowings and for implementation of irrigation scheme (AIBP) through borrowings by NABARD under the Long Term Irrigation Fund (LTIF) in case of revenue expenditure. Meanwhile, it is also used to finance capital expenditure including financing of railway projects through borrowings of the IRFC and financing of power projects through the PFC.
Off-balance sheet financing does not come under parliamentary scrutiny. They also affect the cash flow of public companies. The ministry has made ‘Special Banking Arrangement’ (SBA) in which loans from PSU banks are arranged to make payments against arrears of subsidies with some selected companies. Government makes payments of interest on these loans at G-sec rate. Interest over and above G-sec rate is borne by the companies. Since these measures are used by the government to defer current liabilities and increase the future cost of interest payment, thereby adversely affecting inter-generational equity, CAG report recommended increasing transparency and appropriate disclosures of off-balance sheet financing to the Parliament.
This year again a sizeable chunk of the spending on public infrastructure takes place indirectly via government owned companies (PSUs) rather than through Budget. These PSUs in turn utilize the internal accruals as well as borrowings or extra budgetary resources (EBR) to fund their spending. For FY20, extra budgetary resources for PSUs have been budgeted at Rs 3.97 lakh crore. Though lower than Rs 4.46 lakh crore in FY19 (RE) it is still substantial. EBR for coal has increased while that of others have declined.
The government has set an ambitious target of Rs 90,000 crore under disinvestment for FY20. Though it is much higher than the achievement numbers of Rs 35,533 Cr (upto 29.01.2019) so far, it falls in line with the budgeted number of Rs 80,000 crore for FY19. Though, only 2 months are left for FY19, the government seems confident of achieving this number.
The FM, while delivering his address recalled meeting of the FY 18 disinvestment target of Rs 100,000 crore. There are 57 CPSEs, which are listed with total market capitalisation of over Rs 13 lakh crore and the government appears to be banking on this number to meet the disinvestment targets.
Pradhan Mantri Shram-Yogi Maandhan
*Pradhan Mantri Shram-Yogi Maandhan is a pension scheme for the unorganised sector workers with monthly income up to Rs 15,000. This pension scheme shall provide an assured monthly pension of Rs 3,000 from the age of 60 years on a monthly contribution during their working age.
*It is proposed that an unorganised sector worker joining pension scheme at the age of 29 years will have to contribute Rs 100 per month till the age of 60 years. The government in turn will deposit equal matching share in the pension account of the worker every month. Thus on an annual basis, the pension account per individual will accumulate Rs 2,400 (ignoring the interest accumulation during the year).
*It is expected that at least 10 crore labourers and workers in the unorganised sector will avail the benefit of Pradhan Mantri Shram-Yogi Maandhan within next five years.
Financial of the Scheme
*The pension scheme is a DB-DC kind of arrangement similar to the EPFO’s employees’ pension scheme. It is unclear how the scheme will be administered. The most commonly used arrangement is to create a separate trust where the premiums are accumulated. Since the scheme is a deferred annuity, the pension liability is due after 31 year for a participant age 29 joining today. Thus depending upon the coverage, the cost to exchequer is Rs 1200 per person per year for the first 31 years.
*However, since the scheme creates a deferred pension liability, a calculation could be made on an inter-temporal basis using the actuarial principles. Assuming that entire population of 10 crore is covered in the scheme, then at median population age of 29 years, the total cost to the exchequer on an inter-temporal basis will be substantial.
In the last two years, government has implemented a number of measures to ensure clean banking, which will create strong banks in future. To meet the capital requirements under Basel III, government has done with an investment of Rs 2.6 lakh crore as recapitalization in PSBs. Further, amalgamation of banks has also been done to reap the benefits of economies of scale, improved access to capital and to cover a larger geographical spread.
As of December 2018, a total amount of Rs 51,513 crore has been infused into PSBs. It is desirable that government should infuse the promised recapitalisation amount of Rs 54,487 crore (net of promised Rs 1,06,000 crores) by March 2019. This will act as a big enabler for banks! For the record, PSBs may require another Rs 50,000 crore of growth capital in FY20.
Recently, RBI has deferred the implementation of the last tranche of 0.625 per cent of capital conservation buffer (CCB) from March 31, 2019 to March 31, 2020. This one year window has afforded an opportunity to PSBs by an estimated relief of around Rs 35,000-38,000 crore.
On review of performance of PCA Banks, RBI has removed three Banks i.e. Bank of India, Bank of Maharashtra and Oriental Bank of Commerce, out of PCA frameworks.
Assuming a 11 per cent credit growth in FY20 with credit risk weighted assets of 70 per cent (RWAs to gross advances ratio declined from 80.26 per cent in Sep.17 to 71.20 per cent in Sep.18), PSBs may be requiring around Rs 50,000 crore growth capital in FY20. However, the same also depends upon some major variables i.e. alternate long term investor, recoveries from NCLT, investment environment, out of NCLT settlements/auctions, treasury gains / loss, MTM provisioning of investments, additional or provision write-back.
The TDS limit on interest earned on bank deposits has been increased to Rs 40,000 from Rs 10,000 currently. This was a long pending demand from banks and will reduce the work load of banks in collecting and filling return to the government. If banks interest rate rise further and TDR remain an attractive savings instrument, then this will incentivize some investors to shift from other instruments to bank deposits to get higher return. It is estimated that around Rs 3-5 lakh crore of deposits may surge in TDR in post offices and banks over the year.
Reforms in agriculture
*To address farmer distress and declining farm income, the government in Union Budget 2019-20 announced implementation of Pradhan Mantri Kisan Samman Nidhi (PM-KISAN), which will provide an assured income support to the small and marginal farmers.
*Under this programme, vulnerable landholding farmer families, having cultivable land upto 2 hectares, will be provided direct income support at the rate of Rs 6,000 per year, in three equal instalments of Rs 2,000 each will be credited to bank accounts of beneficiary farmers. Around 12 crore small and marginal farmer families are expected to benefit from this. This programme will entail an annual expenditure of Rs 75,000 crore in 2019-20. The direct income support scheme is much better and possibly the ideal one as the payment is purely a cash transfer to small and marginal farmers who are more vulnerable to price distress.
*We believe, the PM-KISAN scheme is scaled down version of Rythu Bandhu Scheme and more similar with Odisha’s KALIA scheme, where marginal and small farmers are rewarded individually and the fiscal cost is significantly low in compare to the other two schemes.
*The PM-KISAN programme would be made effective from 1st Dec’18 and the first instalment for the period upto 31st March 2019 would be paid during this year itself, for which government provided Rs 20,000 crore in the Revised Estimates (RE) of FY 2018-19.
*One of the major challenges is to identify the beneficiary, as tenant and landless labours will be excluded under the proposed scheme. Second, 100 per cent digitalisation of land record is still pending across many states and even for states like Jharkhand, Bihar, Gujarat, Kerala & Tamil Nadu where it is less than 80 per cent. We believe, the amount of Rs 6000 under PM-KISAN could be enhanced in future with improvement in fiscal space and sharing of burden between Centre and States.
*According to the OECD, no country has instituted basic income as "a principal pillar of income support for the working-age population." But several countries are experimenting with the idea in a small sample of the population. Experiments have been conducted by other countries like USA and Iran.
*USA’s Alaska Permanent Fund is a state-owned investment fund established using oil revenues. Since 1982, it has paid out an annual dividend to every individual in Alaska. Another experiment was conducted by Iran in 2011. The monthly transfer amounted to 29 per cent of median household income, or about $1.50 extra per head of household, per day. Similarly, new basic income pilots have been announced in Canada, Finland, and the Netherlands. There have been several attempts from countries as varied as India, Switzerland, France, New Zealand, Namibia, Scotland, and Germany.
*The argument against UBI is the moral hazard — free money makes people lazy and they drop out of the labour market. The simplest explanation is that unlike in kind programmes, cash transfers (conditional and unconditional) raise the income of households for each unit of labour it already supplies and so can afford to reduce labour without necessarily affecting the household’s income.
*Banerjee, Hanna, Kreindler and Olken (2015) studied the impact of government cash transfer programs on labour supply in 6 developing countries (Honduras, Morocco, Mexico, Philippines, Indonesia and Nicaragua). They find no significant reduction in labour supply (inside and outside the household) for men or women from the provision of cash transfers.
*India will be the first country in the world which is going to provide some sort of direct income transfer to more than 12 crore farmers which is 40,000 times higher than the average number of beneficiaries in these countries who have implemented such cash transfer scheme. We believe, though the present amount is only $7 per month which is very low in comparison to other countries, but with the improvement in fiscal space, the amount could be increased to $13 per month.
*The negative is, many countries who have tried UBI and have found that it does not really impact the economy’s structural problems that keep people poor or generate vast inequalities. But the positive is UBI, apart from ensuring social equity and dignity is a way to get around the leakage and coverage problems associated with current social sector schemes. The danger is once introduced, UBI will be very difficult to repeal.
*Government has declared that all farmers affected by severe natural calamities and where assistance is provided from National Disaster Relief Fund (NDRF), will be provided the benefit of interest subvention of 2 per cent and prompt repayment incentive of 3 per cent for the entire period of reschedulement of their loans. Presently, the crop loans are rescheduled for such affected farmers and they get benefit of interest subvention of 2 per cent only for the first year of the rescheduled loan.
*To provide support to Animal Husbandry and Fisheries sector Government have increased the allocation for Rashtriya Gokul Mission to Rs 750 crore in the current year itself, extension of Kisan Credit Card scheme (KCC) to Animal Husbandry and Fisheries farmers.
*Like agricultural sector, the benefit of 2 per cent interest subvention will be provided to the farmers pursuing the activities of animal husbandry and fisheries, who avail loan through kisan credit card. Further, in case of timely repayment of loan, they will also get an additional 3 per cent interest subvention. This initiative will enhance credit flow to agriculture and allied activities and lower interest burden on farmers there by chances of NPA will come down.
*Government has also decided to create separate Department of Fisheries to provide sustained and focused attention towards development of Fisheries. Presently India is the second largest fish producing nation in the world accounting for 6.3 per cent of global production, registering an average annual growth of more than 7 per cent in recent years. The sector provides livelihood to about 1.45 crore people at the primary level.
*Government has announced to set up “Rashtriya Kamdhenu Aayog” to upscale sustainable genetic up-gradation of cow resources and to enhance production and productivity of cows. The Aayog will also look after effective implementation of laws and welfare schemes for cows. There is a growing awareness about the nutritional superiority of milk from Indian breed cows across the world. So, there is an opportunity for India to improve its research and export milk which has a larger demand.
*In future government may also consider to provide milk in Mid-day meals for children which will improve nutrition of the child and to augment farmers’ income across India. This is expected to cost Rs 10,000 crore. But it will provide extra income (around Rs 7,000 per annum) to farmers, will also augment the overall health standards of 10 crore Indian children.
The government has stayed on its resolve for the growth of MSME sector, which provides employment to crores of people. Towards this, a scheme of sanctioning loans upto Rs 1 crore in 59 minutes has already been launched.
The FM has reiterated the government decision of 2 per cent interest rebate on incremental loan of Rs 1 Crore to the GST-registered SME units. To provide support to the sector, the requirement of sourcing from SMEs by Government enterprises has been increased to 25 per cent, within which at least 3 per cent of such requirement will be sourced from women owned SMEs. The step of recognising the GST compliant small scale registered businesses for granting loan at concessional rate is likely to encourage compliance behavior among small scale business units. Further, the decision of allowing of filing quarterly tax returns as against monthly for businesses having an annual turnover less than Rs 5 crore is a welcome move. It would reduce cost of compliance and will bring in efficiency in the system. It may be noted that this decision would be comprising of over 90 per cent of GST payers.
All these announcements have come against the backdrop of the government pushing the RBI to provide relief to the stressed MSME sector that has been hurt by the disruption caused by demonetisation in late 2016 and the implementation of the GST in July the following year. In March 2016, the RBI had notified a mechanism for resolving stressed MSME loans of up Rs 25 crore. There are around 30 million establishments in India’s informal economy, with MSMEs having a 32 per cent share.
The Budget has lauded the performance of its e-Marketplace (GeM). Under GeMs, transactions of over Rs 17,500 crore have taken place, resulting in average savings of 25-28 per cent. The decision of extending the GeM platform to all CPSEs will further increase the volumes and benefit the MSMEs. Presently there are more than 3,00,000 products, 47,279 sellers and 18,230 buyer organizations associated/registered with GeM. As GeM has taken the entire process of public procurement online, it is also a step in India’s digital journey.
The budget while acknowledging the young demographic profile of the country, points towards the 1 crore youth who have been trained under the Pradhan Mantri Kaushal Vikas Yojana to help them earn a livelihood. The FM said that The Government has harnessed ‘Yuva Shakti’ through self-employment schemes including MUDRA, Start-up India and Stand-up India. Under MUDRA Yojana 15.56 crore loans have been disbursed amounting to Rs 7,23,000 crore.
(The writer is group chief economic adviser, economic research department, SBI)