A Budget exercise that is designed for stressed times

The Finance Minister’s job is a greatly coveted one but no politician would want to be in Nirmala Sitharaman’s shoes today. The Indian economy has slowed to a 5% crawl. The financial system is under considerable stress. Assumptions about tax revenues have gone awry. The clamour for government to ‘do something’ to get the economy going is deafening but there are simply no quick fixes.

What is the best any Finance Minister could have done in the Budget? Two things. One, nudge growth along through a higher-than-normal increase in government capital expenditure. Two, put in place reforms that would result in pay-offs over the long term. The Budget does surprisingly well on the first account. On the second, however, its performance will fall short of market expectations of a whole slew of structural reforms.

Most people thought that with the government facing a shortfall in total receipts of anything in the range of ₹1,50,000-₹3,00,000 crore, the axe would fall on government capital expenditure. The biggest positive in the Budget is that this has not happened in 2019-2020 and it is not projected to happen in 2020-2021 either.

Capital expenditure in 2019-2020 turned out to be ₹10,338 crore more than the Budget estimates, a rise in 13.4% over the actuals of 2018-2019. In 2020-2021, it is expected to rise by 18% over the figure for 2019-2020.

Capital expenditure as a percentage of GDP was 1.7% in 2019-2020 and is projected to rise to 1.8% in 2020-2021, assuming that the revenue projections hold substantially. The Finance Minister deserves credit for wanting to maintain the momentum of capital expenditure at a time of faltering growth.

Watch: sector-wise highlights from the Budget

Tax revenues below estimates

The receipts for 2019-20 are not as alarming as many had thought. Tax revenues (net to the centre) have fallen short of budgetary estimates by around ₹1,45,000 crore. The reduction in corporate tax rate last year cost the government nearly ₹1,00,000 crore. The fall in tax revenues has been offset somewhat by a rise in non-tax revenues of around ₹32,000 crore, mainly on account of a larger-than-projected transfer of Reserve Bank of India (RBI) surplus to the government. Disinvestment receipts have fallen short of budgetary estimates by ₹40,000 crore. In effect, the total disappointment in receipts has been of the order of ₹1,50,000 crore, which is at the lower end of market estimates.

A complete surprise is that revenue expenditure is lower than the budgetary estimate by ₹98,000 crore, mainly on account of a reduction in food subsidy. The net effect of the differences in receipts and expenditure with respect to budgetary estimates is an increase in the fiscal deficit by ₹63,000 crore, or about 0.3% of the budgetary estimate of GDP for 2019-2020. Factor in a lower-than-expected growth in the denominator, nominal GDP, and you end up with a fiscal deficit-to-GDP ratio that is 0.5 percentage points higher than the budgetary estimate, that is, 3.8%. The Finance Minister has justified this by saying that it is within the deviation of 0.5% permitted by the Fiscal Responsibility and Budget Management (FRBM) Act.


For 2020-2021, the Finance Minister has projected a fiscal deficit at 3.5% of GDP, again a deviation of 0.5% from the plan given earlier. It is hard to fault the Finance Minister for not opting for an even bigger fiscal stimulus — after all, capital expenditure growth is not being compromised. Provided, however, the rest of the arithmetic for 2020-2021 holds up. Will it? Let’s take a look at the key numbers.

The projected growth in net tax revenue to the Centre, of 8.7%, is eminently reasonable, given a projected nominal growth of 10%. As for non-tax revenues, dividends and profits from public enterprises and the RBI have been assumed at a lower level than in 2019-2020. This suggests that transfer of surplus from RBI in the next year has been correctly assumed to be lower.

Disinvestment target

The big ‘if’ is about disinvestment receipts. The government expects to rake in ₹2,10,000 crore, way above the receipts of ₹65,000 crore in 2019-2020. The projected receipts include ₹1,20,000 crore from disinvestment in public sector undertakings and another ₹90,000 crore from disinvestment in LIC and IDBI Bank. The latter will, no doubt, be seen as significant reform of the financial sector by market analysts. However, both the intended sales raise issues. LIC performs a useful role in shoring up the stock market when required. It is also an important investor in the capital of public sector banks.

If institutional and retail investors are given a stake, the larger public role performed by LIC may be called into question. It would be best if a stake sale in LIC were referred to a Committee of Parliament. As for selling the government’s holding in IDBI Bank, the sale price could become a contentious issue until the bank effects a significant turnaround.

If the disinvestment estimates are not met, it would upset the budgetary arithmetic and the fiscal deficit target of 3.5% of GDP. There is not even a pretence of meeting the FRBM target of 3% of GDP in the near future, not even by 2022-2023. Perhaps the time has come to revisit the target itself and the maximum deviation permissible from the plan. The suggestion that the government should aim to meet the target of 3% over an entire business cycle and not in any given year is worth considering.

There is some relief for income tax payers in the lower slabs. They have the option of choosing a lower tax rate or sticking to the existing one with exemptions. This makes the income tax system messier. Besides, some of the exemptions have to do with encouraging savings. If taxpayers shift away from exemptions in large numbers, it could have adverse implications for the domestic savings rate.


Market analysts expected the Budget to announce sweeping reforms. The Economic Survey listed a number of items that lend themselves to reform, like the Essential Commodities Act; drug price controls; foodgrain markets, etc. These find no mention in the Budget. Apart from stake sale in IDBI Bank, the public sector banking system has been left untouched. There is also no significant initiative in respect of non-banking financial companies (NBFCs). Asset monetisation is said to be the next frontier for raising revenues. The Budget mentions monetisation of roads covering 6,000 km by 2024 but one can’t find any corresponding numbers in the budgetary figures.

The Economic Surveys of the last two years have made the case for a serious thrust towards reliance on markets and private investment and a shrinking role for the government. There is no sign yet of any dramatic shifts. The political preference for caution and gradualism has not waned, which is just as well.

T.T. Ram Mohan is a Professor at IIM Ahmedabad. Email:

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Printable version | Mar 8, 2021 11:40:13 AM |

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