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    Off-Budget policy changes hold key

    Synopsis

    The Budget should use the FY12 numbers as a mirror to itself while presenting the deficit.

    Looking ahead shutterstock_484668703Shutterstock.com
    Interestingly, there are a lot of changes that could be made outside the budget itself and this piece is all about them.
    By Soumya Kanti Ghosh

    The Union Budget will be presented at a time when growth has declined to 5 per cent with a clear downward bias and the outlook does not look promising. The only solace that the global outlook looks better with US and China closing in a trade deal and oil getting increasingly divorced from geopolitical conflicts. Against this background, it is crucial that the budget gets its fiscal arithmetic right as such could make the first step towards a slow and gradual recovery. Interestingly, there are a lot of changes that could be made outside the budget itself and this piece is all about them.

    The budget should use the FY12 numbers as a mirror to itself while presenting the deficit. The significant decline in growth in FY12 (5.2 per cent from 8.5 per cent in FY11) was not anticipated and the government missed the budget fiscal deficit target by a huge margin of 130 basis points (from a budgeted fiscal expansion of around Rs 31,409 crore to actual Rs 1.34 lakh crore. In the same vein, any attempt to peg fiscal deficit at closer to 3.5 per cent in FY21 budget will clearly look unreasonable and not credible to the market as we will be lucky if we get a nominal GDP growth of 10 per cent in FY21. There is no harm if the fiscal deficit is maintained at the same level over FY20 and FY21 and incrementally reduce it beginning FY22 as growth comes back to over 6 per cent. By repeatedly emphasising that we will stick to the mandated fiscal consolidation path during a year when growth is a serious challenge makes us prone to non-transparent and non-credible fiscal rules that markets will not believe in.

    First, some numbers. In FY21, assuming 10 per cent GDP nominal GDP growth, net government borrowings are likely to be closer to Rs 5.5 lakh crore if fiscal deficit is taken at estimated 3.8 per cent of GDP. With repayment around Rs 2.35 lakh crore, gross borrowings of the Centre are expected to come at Rs 7.85 lakh crore. Higher fiscal deficit will push up securities issued against the small savings as the government will try to minimise its recourse to market borrowings.
    The government has already raised Rs 1 lakh crore through small savings in current fiscal and will be able to meet their budget estimate target of Rs 1.30 lakh crore. In FY21 again it might increase it further.

    This increased reliance on small savings in turn would make it difficult for the government to cut small savings interest rate and thus bank deposit rates are unlikely to witness a material decline from current levels.

    Given the crisis of confidence in the financial markets it is imperative that central banks don’t forget their primary function of being the lender of the last resort. Alternatively, it is imperative that the RBI backstops against good quality collateral. They must be identified to ensure the stability of NBFCs so that they can meaningfully withstand any worsening of the situation, both in terms of access to liquidity and in terms of absorbing potential losses.

    What about steps outside budget? As of March 2018, a total of Rs 7.8 lakh crore of tax revenue is under dispute and is pending before various tax appellate authorities i.e. the Commissioner of income Tax (Appeals), Income Tax Appellate Tribunal, High Court and the Supreme Court of India. Some of these are because of non-synchronisation in rules across regulators and needs to be changed.

    For example, the Income-tax Act (Rule 6EA) continues to recognise bad and doubtful debts based on six-months overdue delinquency norms. However, the RBI guidelines provide for a period of 90 days of overdue delinquency norms to recognise bad and doubtful debts.

    Similarly, the banks are eligible to avail deduction in respect of provision made for bad and doubtful debts only upto 7.5 per cent of total taxable income even when they are making provision for bad and doubtful debts in accordance with RBI guidelines.

    The simplification in GST could be again done by the GST Council itself. Among the major issues in GST are inadequate allocation of IGST to states and non-compliance of GSTR-1 and GSTR-3B. This mainly happens in case of business to consumers transactions as IGST is collected in the state producing the good while the input tax credit will be collected in the state where consumption takes place.

    As per the CAG report for the year ended March 2018, upto 31 per cent of the GSTR-3B filers didn’t file GSTR-1. Thus, better compliance and monitoring is possible if the GST filing is simplified for businesses and this will automatically lead to higher revenues.

    The other important change that could clearly happen outside the budget is finding a lasting solution to the telecom sector. Given that consumption has slowed down, if any of telcos discontinue their operations this could hurt investment sentiments and jobs.

    We end with a positive note. Even though growth outlook continues to look sombre, the rural sector is finally showing signs of better traction with food prices moving up. While this may be a bit of bad news for consumers the fact that the minimum support price has moved above market prices in select commodities like cereals and some categories of pulses will ensure that farmer will make some returns. This is clearly visible in specific categories of pulses like moong, arhar and gram.

    (The author is group chief economic advisor, SBI. Views are personal.)



    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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