“First, Do No Harm” Budget

Nirmala Sitharaman and her team have a more difficult job than the jobs of all the sundry advisers, think tanks and critics put together. She actually has to balance the budget. For almost everyone else it is sufficient to comment on only one side of India’s accounts. To further elucidate her challenge, the chief economist of IMF had some sage guidance against fiscal slippage. On the other hand, a Nobel laureate urged India to spend its way out of a slowdown, while allowing the fisc to slip at least in the short-term. With limited monetary elbow room, constricted fiscal leg-space, global economic landscape a tinge more grey than the Indian economy would have liked, the FM did what she could. Not sure whether Susrut, the legendary Indian surgeon had an oath attributed to him but his Greek peer Hippocrates did. A core theme of the oath being Primum Non Nocere — First, Do No Harm. Taken by medical students, it impresses on them that they must ensure at least no harm comes to the patient because of their treatment. Of course, the patient may die of other reasons. Similarly, the current Budget will not harm the economy.

Fiscal spillage on expected lines: The government is targeting a fiscal deficit of 3.5% for FY21. Since the current fiscal deficit is 3.8%, this is an optimistic projection. The actual number is likely to hover around 4%. Here, the assumption is of nominal GDP growth of 10% in FY21. Given no significant push in last five months of H2FY20, GDP growth would remain weak and growth moderation may continue for a couple of quarters. Thus, 10% nominal GDP growth may be a tad optimistic. Ironically, the likelihood of it being achieved is higher due to inflation rather than higher real growth. 

Given the anticipated economic growth, the tax receipts projected for FY21 may also be optimistic. However, given that the government may have to continue supporting the economy’s spending, expenses are unlikely to find any reprieve. While the budget has several features which are enablers of business growth in the long term, an explicit short term push on corporate spending is missing. At any rate, the fiscal deficit may breach the 3.5% target. 

One could have argued that the economy may be going down without a fight. However, given the recent upward pressure in inflation, moderating global economic activity and rising geopolitical risks, there is limited margin of safety. What may be pointed out is that the policy-making setup has taken up a much stricter fiscal deficit target of 3%, than could have been achievable on a sustained basis for India, which is not to say a runaway fiscal deficit is supported, but then there can be too much of a good thing! 

Hope we are lucky: In the past, a lot of Indian budgetary bets turned out to be supportive of India. In the period post taper tantrum (2013), low crude oil price and low global interest rates have helped Indian current account and also the trajectory of fiscal deficit and inflation. It is a matter of debate whether just enumerating a glide path on inflation and explicit inflation targeting would have helped if the external environment had not been relatively benign.

The hope implicit in the current Budget is that the current financial year is likely the bottom of the economic slowdown. In the absence of any explicit push for short-term revival, it is difficult to foresee whether the economy has reached its bottom. In case the downward trajectory continues, the fiscal position will slip further and with it the ability to turn the economy around. One also hopes in for no external shocks in the next few years, which will cause a risk aversion towards emerging markets. Otherwise, the monetary and fiscal ability to respond will be very limited.

Surviving to fight another day: Considering the fiscal constraints, the government gave a strong message with regards to its desire to improve human resources in the country. An outlay of Rs.993 billion for FY21 over Rs.948.54 billion the previous year shows that the government has every intent to check the drop in relative outlay of education, which has been falling in the previous few years. Likewise, broadening the scope of health care and pension/insurance scheme underlines the government’s intent to create a safety net for economically weakest sections of the society.

In continuation with the theme of improving the attractiveness of start-ups in general, ESOP norms have been liberalised enabling start-ups to attract talent. Likewise, specifically for start-ups in manufacturing and power sectors, concessional tax rate of 15% is supportive. Particularly, noteworthy are the continued efforts to boost MSME — be it in terms of enabling better credit and financing access or easing the complexity of their account books.

Clearly, the long term looks brighter than the immediate short-term. In the next couple of quarters the concerns on capital investment, job creation and the like will remain. However, the structural changes enumerated in the Budget, if implemented well would likely accrue a positive impact of the economy in the medium to long term. Thus, it's time for some long-term call options on the Indian economy, while remaining cautious and vigilant on the immediate future.