Union Budget 2019-20: A peek into the many challenges Sitharaman faces

Expectations are high from the Budget, given that Prime Minister Narendra Modi came back to power following a bigger mandate than his first term

Two days from now, Finance Minister Nirmala Sitharaman will present her maiden budget, becoming only the second woman, after Indira Gandhi, to do so. Expectations are high from the Union Budget 2019-20, given that Prime Minister Narendra Modi came back to power following a bigger mandate than his first term. As such, Sitharaman will have to face a tough balancing act, as she looks to boost growth.

The challenges Sitharaman faces are many. Gross domestic product (GDP) growth slumped to a five-year-low of 5.8 per cent in the January-March quarter, as India lost its tag of the world’s fastest growing economy to China. Meanwhile, it was officially confirmed that unemployment has touched a 45-year high. The signs are clear that there is a rural slowdown, consumption and demand are suffering and private investment still remains muted. Sitharaman will look to boost domestic consumption, address the rural crisis and support micro, small and medium enterprises.

The Modi government is expected to continue its focus on rural and social schemes which will show tangible results. So after rural electrification, housing, toilets and cooking gas, the next big promise that the budget is set to make is that of ensuring piped water to every household by 2024. Sitharaman is expected to provide the initial allocation for the ‘Jal Jivan Mission’ and ‘Nal se Jal’ initiative. The new Jal Shakti Ministry, which unifies all the functions of various departments dealing with water issues, will be the nodal ministry for this.

The BJP is giving a lot of political importance to this scheme. In arid states like Rajasthan, all BJP candidates and workers, during the 2019 Lok Sabha election, were speaking of this scheme to rural voters. “Just like Modiji brought cooking gas and electricity to your homes, he will also bring tapped water so you don’t have to fetch from wells,” was the common campaign pitch. Hence, one can expect a substantial chunk of Sitharaman’s budget speech on Friday to focus on water and an increase in allocation for water-related schemes.

Other manifesto promises that are likely to make their way into the budget include the ‘Matsya Sampada Yojana’ to provide storage and marketing infrastructure for fishermen, a National Traders Welfare Board, a National Warehousing Grid for farmers.

Focus will continue on existing flagship schemes like PM Kisan, NREGA, and health and education programmes. One can except increased allocations for these schemes compared to the interim budget. Especially with schemes like PM Kisan and NREGA, the idea is to place more money in the hands of the rural population to enable higher spending. Already, the expansion of PM Kisan to all landed farmers has led to a bump of Rs 12,000 crore in the outlay, over and above the Rs 75,000 crore allocation for 2019-20.

However, this does not necessarily mean that there will be a huge increase in the total budget size compared to the Rs 27.84 lakh crore set in the interim budget. Finance Ministry officials aim to find money for the new schemes and announcements by making adjustments within the topline, by diverting sums from other spending commitments. Already, it is expected that the centre could leave as much as around Rs 62,000 crore in pending fuel and fertilizer subsidy arrears from previous years unpaid, and furthermore rollover that amount to FY2020-21.

The centre is looking to maintain a fiscal deficit target of 3.4 per cent of GDP for a number of reasons. The biggest of these are the impending recommendations of the Fifteenth Finance Commission, which will lay down the devolution of the taxable pool between centre and states. The government would rather wait for the Finance Commission report, and how much it will extract from the centre’s resources, before taking a call on any fiscal expansion in the 2020-21 budget, if necessary

The second reason is Modi himself. The PM has been very particular about maintaining fiscal discipline and is said to feel strongly about the centre’s credibility being tied to its ability to meet budgeted targets, especially since the fiscal deficit target is now more a political decision than an economic one.

However, retaining the fiscal deficit target will be easier said than done, and Modi and Sitharaman may as well bite the bullet and go for a slight expansion. Each 10 basis points increase in the fiscal deficit will lead to an additional spending room of Rs 21,000 crore.

The revenue situation is quite dire. The goods and services tax (GST) mop-up fell below the Rs 1-trillion-mark for the first time in four months in June. It grew by a meager 4.5 per cent to Rs 99,939 crore, against 6 per cent growth in May. The target in the interim Budget, along with projected growth in state GST (SGST), required collections to touch Rs 1.3 trillion a month. With this shortfall, the target might become daunting.

Figures given in the interim Budget showed that corporate tax collections would be higher by 15 per cent in 2019-20 over actual collections in 2018-19 and that personal income tax collections would increase by an even greater proportion — by 34 per cent. The Central Board of Direct Taxes has asked for a reduction of the target as growth is wavering. GST collections, closely related to the health of the economy, is projected to increase by 31 per cent in the interim Budget for 2019-20 over actual collections in 2018-19.

This leaves the onus on non-tax revenue and disinvestment. The government is banking on higher surplus from the Reserve Bank of India and hoping that the Bimal Jalan committee provides it that impetus. However, as per reports, the panel may not recommend as high an amount to be transferred to the centre as the latter is expecting. There will surely need to be an expansion of the centre’s privatisation plans.