For the past few years, Union Budgets have become non-events since many of the key policy steps were taken outside the ambit of the annual exercise. However, this years Budget, slated to be presented on July 5 by the second lady Finance Minister of India, may turn out to be different since it provides a unique opportunity for th new government to address the multiple challenges facing the economy.
It is widely expected that the Union Budget will have a slew of measures that, if played out in full, will support growth both in the short-term and in the long-term. It may be noted that economic expansion during last fiscal has slowed down to a five-year low of 6.8 per cent, with growth for the running fiscal (2019-20) pared down substantially by the Reserve Bank of India.
We, therefore, believe that the Finance Minister will seize upon this opportunity to reboot economic growth and the Budget 2019-20 will, and can, act as a catalyst for growth for a slowing economy, given the strong political mandate for the government that ensures stability in polices which is a necessary condition to spur economic growth.
The Budget may be personally important for the Finance Minister since it gives her a unique opportunity to prove her mettle as she has stepped into the shoes of her more illustrious predecessors, but she has a daunting task of bringing back growth while maintaining fiscal discipline.
While growth remains the dominant theme, options to raise resources to fund a slew of supporting programmes and welfare schemes that were already announced by the government, remains a key issue. With the government crossing the half-way mark of the budgeted fiscal deficit through the first two months of this fiscal, the Finance Minister will have to look for other means to raise resources.
There is also a fair chance that the private sector may find it difficult to raise funds in the wake of increased government borrowing and a tight liquidity scenario in the economy set off by the corporates deleveraging their balance sheets following the IL&FS crisis.
It is all the more important to increase household financial savings which will improve the liquidity situation in the economy without building price pressures. At the same time there is an express need to improve the Tax-to-GDP ratio without burdening tax payers with additional levies. For this to happen, tax officials should step up vigil against tax evasion at all levels and bring more people under the tax net.
Going by the government’s vision of doubling farm income, we are of the view that the Budget will have a rural bias. We can also see the government giving thrust to rural infrastructure and affordable housing. The prolonged slowdown witnessed in the automobile sector could probably nudge the FM to introduce a “scrappage” policy for old vehicles as this may act as a catalyst to commercial vehicle producers and also to NBFCs who finance these vehicles.
We also expect the Finance Minister to clearly spell out the divestment policies, including those of strategic public sector undertaking (PSU) divestiture and un-utilised land assets with state-owned undertakings.
The Budget can also lay down a clear road map for recapitalisation of state-owned banks and also provide them with growth capital.
The Ayushman Bharat Healthcare Scheme is expected to get more clarity in the Budget. Markets would be keenly looking for innovative funding schemes to carry out the massive infrastructure spend needed to revive a slowing economy and this could be a big test for the Finance Minister.
Capital markets are also hopeful of the Budget doing away with the incidence of double taxation so as to lift a sagging primary market which is so vital for corporates to raise equity capital.
(S. Ranganathan is the Head of Research, LKP Securities. The views expressed are personal)