Despite the mounting pressure to make an attempt to kick-start the economy that is languishing at the 11-year low GDP growth of 5% from all the sundry, the Finance Minister, Nirmala Sitharaman, staying focused on the disturbing phenomenon of falling tax revenues and rising borrowings, labored to present a budget that tries to balance growth with fiscal prudence. This has, of course, caused a lot of disappointment to those who strongly believed that in a scenario like the one our economy is currently faced with increased government spending is the only way to keep the wheels of economy turning instead of blindly adhering to an arbitrary fiscal guideline.

That said, it must also be noted that the Finance Minister has indeed overrun the fiscal target of 3.3% of GDP set for the current fiscal 2020 by as much as 0.5% which, despite a cutback in expenditure in terms of lower subsidies (74,596 crore) and reduced interest payments (35,366 crore), has become inevitable largely on account of the less-than expected growth in revenues. She has however justified this slippage quoting that it is within the deviation of 0.5% allowed by the Fiscal Responsibility and Budget Management Act.

In the same vein, she, relying on the assumption of a nominal GDP growth rate of 10%, has projected the fiscal deficit target for the Fiscal 2021 at 3.5% against the targeted 3%. This sounds pretty optimistic for more than one reason. First, the economy needs to grow at 10% from the estimated nominal growth rate of 7.5% for 2019-20, which is highly debatable in the absence of any major stimulus being offered by the budget. Second, the growth in tax revenues estimated at 11.99% appears to be equally optimistic for as much as 11.54% of it is expected to accrue in the form of corporate tax collections.

Over it, it is expected to mobilize a whooping sum of 210,000 crore as disinvestment proceeds. Of this, 120,000 crore is expected to come from disinvestment of non-financial public sector undertakings and another 90,000 crore from disinvestment of equity in public sector banks and financial institutions. Given the experience of disinvestment progress accomplished in 2019-20 — as against a budgeted disinvestment proceeds of 105,000 crore for the Fiscal 2020, realization as at the end of January 2020 stood at a mere 18,000 crore — the projection for Fiscal 2021 appears to be daunting. Another disturbing feature of the disinvestment plan is that it increases the government’s demand on the capital market by about 20%, which may result in crowding out effect for private investment.

That aside, the budget has also taken into account a likely receipt of 133,027 crore from the telecom players, which apart from the regular licence fees and spectrum charges also includes the arrears that are to be paid by them on account of the recent Supreme Court verdict that went against them. These two non-tax receipts by virtue of their together constituting about 11% of the total receipts budgeted for Fiscal 2021, acquire greater importance, for their non-accomplishment would mean derailment of the very budget and its fiscal deficit estimates.

Now, against these inbuilt constraints of the budget, let us examine how it hopes to revive the growth. There is a clear indication that it plans to stimulate growth through increased spending and tax rate cuts: Year-on-year, government’s expenditure is budgeted to grow by 12.7%. In a scenario of faltering growth, it is encouraging to note that the capital expenditure is expected to rise by 18% YoY, though there is glitch: much of it is expected to flow in through PPP, the experiences under which are none-too-happy here before. Simultaneously, by hiking the import duties on such products where India has the manufacturing capability—a measure considered by economists as a retrograde step, for it won’t lead to any improvement in the operational efficiencies of this lot—budget attempted to give a boost to the domestic manufacturers.

Secondly, the relief announced for taxpaying individuals in the lower slabs is likely to put more disposable income in the hands of certain sections of people which, though has negative implication on private savings, is hoped to boost spending to a certain extent. But the cut in the allocation under MGNREGA vis-a-vis the revised estimate of 71,002 cr in 2019-20 and the proposed overall spending cut under various social sector schemes are likely to offset whatever additional demand for consumption anticipated under tax rate cuts.

Whilst talking about rise in expenditure budgeted for and the resulting rise in fiscal deficit, we cannot afford to ignore the purpose of the additional expenditure. Unfortunately, in the current budget, most of the borrowing is meant for financing current consumption. Indeed, the revenue deficit is projected to increase from 2.4% of GDP in Fiscal 20 to 2.7% in Fiscal 21. Any increase in the fiscal deficit owing to capital expenditure is a much better option, for it not only generates returns but also creates fresh employment and thus the benefits of such rise in FD is long lasting. Such an effort however, appears to be missing in the current budget.

Although the Economic Survey suggested for a relook at some of the prevailing archaic laws such as Essential Commodities Act, Drug price controls, food grain markets, etc., so as to move towards reliance on markets and private investment for growth, Finance Minister has not gone for worth-mentioning reforms except for shifting the tax burden on dividends from corporates to individual investors, which has disappointed even the rating agencies. That being the innate constraints of the budget, one has to keep fingers crossed and hope the optimism exuded by the budget becomes a reality in the next four quarters.