Budget 2020-21 Modi 2.0 government

Finance Minister Nirmala Sitharaman is all set to present her first full year Budget in Modi 2.0 government on February 1, 2020. All eyes will be on any new announcements to revive the economy as after holding its position as the world’s fastest-growing major economy for four years, India was predicted to emerge as the third largest economy after the US and China. In the Budget, the Finance Minister will have to address slowing economy, low consumer confidence, rising inflation, sagging demand, fiscal deficit constraints, GST simplification, job creation, exports revival, agrarian crisis and raise public investment without compromising on fiscal prudence.
Budget 2019-20 reflects the Government’s firm commitment towards development of infrastructure and confers several benefits on MSMEs. This is substantiated by increase in budget expenditure of 2019.20. The Gross Tax Revenue is budgeted at Rs 24,61,195 crore in Budget Estimates (BE) 2019-20 which reflects a growth of Rs 2,13,020 crore (9.5%) over Revised Estimates (RE) 2018-19. Direct taxes are expected to reach Rs 13,35,000 crore in BE 2019-20 compared to Rs 12,00,000 crore in RE 2018-19, while Non-Debt capital receipts are expected to be Rs 1,19,828 crore in BE 2019-20. On the other hand, total expenditure in 2019-20 is pegged at Rs 27,86,349 crore which is an increase of Rs 3,29,114 crore (13.4%) over RE 2018-19. Revenue Expenditure is estimated to be Rs 24,47,780 crore in BE 2019-20 as compared to Rs 21,40,612 crore in RE 2018-19 which reflects an increase of Rs 3,07,168 crore in BE 2019-20 over RE.
Meanwhile, the gross tax revenue is anticipated to grow by 10.6% and 12.4% over previous year in 2020-21 and 2021-22 respectively reflecting a Tax GDP ratio of 11.6% in both years. These figures are inclusive of GST compensation cess. Non-tax revenue receipts of the Central Government are expected to be 1.4% of GDP in 2020-21 and 2021-22. However, the total Government expenditure is expected to grow at a lower rate in 2020-21 and 2021-22 as compared to 2019-20. The decreased growth rate is expected mainly on account of revenue expenditure. Capital expenditure on the other hand is anticipated to grow at 9.5% and 15% over previous year in 2020-21 and 2021-22 respectively.
(Fig in Rs Cr.)
Now let’s deal one by one few major areas that the Union Budget will have to tackle:
Fiscal Consolidation:
India’s fiscal deficit hit 114.8% of 2019-20 Budget Estimate (BE) at Rs 8.07 lakh crore at the end of November 2019. The fiscal deficit or the gap between expenditure and revenue was at Rs 8,07,834 crore as on November 30, 2019. The Government of India has received Rs 10,12,223 crore (48.60% of corresponding BE 2019-20 of Total Receipts) up to November 2019 comprising Rs 7,50,614 crore Tax Revenue (Net to Centre), Rs 2,32,600 crore of Non-Tax Revenue and Rs 29,009 crore of Non-Debt Capital Receipts. Total Expenditure incurred by Government of India is Rs 18,20,057 crore (65.3% of corresponding BE 2019-20), out of which Rs 16,06,215 crore is on Revenue Account and Rs 2,13,842 crore is on Capital Account. The government has pegged its total expenditure for 2019-20 at Rs 27.86 lakh crore.
Out of the Total Revenue Expenditure, Rs 3,41,812 crore is on account of interest payments and Rs 2,35,015 crore is on account of major subsidies. The government has estimated the fiscal deficit for the current financial year at Rs 7.03 lakh crore, aiming to restrict the deficit at 3.3% of the gross domestic product (GDP). Besides, the government is likely to cut spending for the current fiscal year by as much as Rs 2 trillion as it faces one of the biggest tax shortfalls in recent years. Asia's third largest economy, which is growing at its slowest pace in over six years because of lack of private investment, could be hurt further if the government cuts spending. But with a revenue shortfall of about Rs 2.5 trillion, the government has little choice to keep its deficit within acceptable limits. Besides, there are expectations that government may miss its fiscal deficit target in current fiscal year and likely to target slightly higher for the next fiscal year (FY21).
The Finance Ministry said that tax officials detected Rs 37,946 crore worth of tax fraud in 2018-19 and Rs 6,520 crore in the April-June period of the current financial year after the GST implementation. Besides, cases of tax credit availment by issue of fake invoices were of Rs 11,251 crore in 2018-19 and Rs 2,805 crore in April-June of the current fiscal. Meanwhile, amid concerns that the government may fall short of its tax collection target in a slowing economy, the Centre has set an ambitious Rs 1.1 lakh crore monthly GST target for the remaining four months of the current fiscal (December 2019 and March 2020) and asked taxmen to step up efforts to achieve the goal.
The expenditure on Major subsidies on Food, Fertilizer and Petroleum remains the second significant component of revenue expenditure. In BE 2019-20, expenditure on account of subsidies is expected to be Rs 3,01,694 crore. This reflects an increase of 13.3% from RE 2018-19. As a percentage of GDP, these remain unchanged at 1.4%. In the medium term, it is expected that the measure of subsidy rationalisation will bear fruits and subsidy outgo as a percentage of GDP will come down to 1.3% of GDP in 2020-21 and 2021-22. 
The actuals on these heads up to June end 2019 totalled Rs 1,51,824.24 crore on the BE of Rs 2,96,684 crore. On a Corresponding Period of the Previous Year (COPPY) basis, the amount was Rs 1,16,820.17 crore (44%) of the BE, whereas the current figures are 51% of the BE. Quite expectedly, the food subsidy as on June-end grabbed a major chunk at Rs 94,406.16 crore, as against the the BE of Rs 1,84,220 crore (51%). On a COPPY basis, it was Rs 88,266.74 crore (52% of the BE of last fiscal).
Nutrient-based fertilisers subsidy touched Rs 9,606.18 crore (39% of BE) as on June-end which was Rs 8,238.34 crore in the same period of last fiscal (33%). The BE for the current fiscal for this subsidy is Rs 24,832 crore. The petroleum subsidy was Rs 28,328.91 crore for the period in consideration which was 76% of the BE of Rs 37,478 crore, while on a COPPY basis this was Rs 11,724.13 crore amounting to just 47%. Besides, there are expectation that government may allocate more funds for domestic liquefied petroleum gas (LPG) and kerosene oil subsidy if the current volatility in global crude oil prices continues. 
External Sector:
The India’s exports stood at $239.29 billion in the period April- December 2019-20 as against $244.08 billion during the period April- December 2018-19, registering a decline of 1.96%, on account of a significant fall in shipments of plastic, gems and jewellery, leather products and chemicals. On the other hand, the imports during April-December 2019-20 stood at $357.39 billion, as against $392.31 billion during the period April-December 2018-19, registering a fall of 8.90%, as all major items, including gold, witnessed a decline. Trade deficit - gap between imports and exports - narrowed to $118.10 billion in the period under review from $148.23 billion in the corresponding period of last year, helped by lower oil imports. 
India’s exports are expected to touch $330-340 billion during the current financial year (FY20) due to uncertain global situation and rising protectionism. During April-November 2019-20, exports dipped by about 2% to $212 billion. The global situation is becoming extremely challenging as rising protectionism is leading to uncertainty in global trade which will have adverse impact on it. Despite having a moderate share in global trade, India’s exports have always followed the trend in global imports. Therefore, when global imports are declining, India’s exports are also likely to take a hit. The infrastructure improvement and initiatives on the logistics front will further improve competitiveness of exports. Moreover, if the global situation improves, which is likely in the first half of 2020, India may look for 15% growth in exports during the next financial year (FY21).
The National Statistical Office (NSO), under Ministry of Statistics and Programme Implementation, in its First Advance Estimates of National Income, 2019-20, has stated that India's Gross Domestic Product (GDP) growth is expected to fall to an 11-year low of 5% in the current fiscal year (FY20), as compared to the growth rate of 6.8% in 2018-19, mainly due to poor showing by manufacturing and construction sectors. As per the data, real GDP or GDP at Constant Prices (2011-12) in the year 2019-20 is likely to attain a level of Rs 147.79 lakh crore, as against the Provisional Estimate of GDP for the year 2018-19 of Rs 140.78 lakh crore, released on May 31, 2019. Real GVA, i.e, GVA at Basic Constant Prices (2011-12) is estimated to increase from Rs 129.07 lakh crore in 2018-19 to Rs 135.40 lakh crore in 2019-20. Estimated growth of real GVA in 2019-20 is 4.9% as against 6.6% in 2018-19.
The Per Capita Net National Income during 2019-20 is estimated to be Rs 1,35,050 showing a rise of 6.8% as compared to Rs 1,26,406 during 2018-19 with the growth rate of 10.0%. Gross Fixed Capital Formation (GFCF) at Current Prices is estimated at Rs 57.42 lakh crore in 2019-20 as against Rs 55.70 lakh crore in 2018-19. At Constant (2011-12) Prices, the GFCF is estimated at Rs 45.93 lakh crore in 2019-20 as against Rs 45.48 lakh crore in 2018-19. Government Final Consumption Expenditure (GFCE) at Current Prices is estimated at Rs 24.34 lakh crore in 2019-20 as against Rs 21.35 lakh crore in 2018-19. At Constant (2011-12) Prices, the GFCE is estimated at Rs 16.65 lakh crore in 2019-20 as against Rs 15.06 lakh crore in 2018-19.
With weak domestic and external demand conditions, the central bank has revised its real Gross Domestic Product (GDP) growth forecast downwards to 5.0% for 2019-20 (FY20) from 6.1% projected in its October policy. It also said growth is likely to be 4.9-5.5% in H2 and 5.9-6.3% for H1:2020-21. The RBI stated that while improved monetary transmission and a quick resolution of global trade tensions are possible upsides to growth projections, a delay in revival of domestic demand, a further slowdown in global economic activity and geo-political tensions are downside risks. The growth in GDP during the FY19 stood at 6.8%, lower than 7.2% in the previous financial year. The GDP growth was slowest since 2014-15 as the previous low was 6.4% in 2013-14.
The inflation based on Consumer Price Index (CPI) and Wholesale Price Index (WPI) remained high during 2019-20. Retail inflation based on CPI jumped to an over five-year high of 7.35% in December 2019, with spiraling prices of vegetables. The CPI was 2.11% in December 2018 and 5.54% in November 2019. The previous high in retail inflation was witnessed at 7.39% in July 2014. The inflation was above the Reserve Bank of India’s (RBI) upper tolerance limit of 6% at the time of economic growth slowdown. The overall food inflation rose to 14.12% in December as against (-) 2.65% in the same month of 2018. It was also significantly higher than the 10.01% recorded in November 2019. CPI is expected to further harden next month due to elevated price level of food prices mainly vegetables.
Similarly, wholesale prices based inflation surged to an eight-month high of 2.59% in December, as against 0.58% in November due to sharp rise in prices of food articles like onion and potato. WPI was at 3.46% during December 2018. The annual inflation, based on monthly WPI was recorded at 3.24% in April 2019. The rate of price rise for food articles was 13.12% during December as against 11% a month earlier, while for non-food articles it rose nearly four-fold to 7.72% from 1.93% in November. Among food articles, vegetable prices surged by 69.69% mainly on account of onion, which witnessed 455.83% jump in prices, followed by potato at 44.97%.
The Inflation Expectations Survey of Households conducted by RBI in November 2019 stated that households’ inflation perceptions and expectations increased sharply in the November 2019, round on top of the pick-up in the previous round. Three months ahead and one year ahead median inflation expectations increased by 120 basis points and 180 basis points, respectively. More households expect higher inflation across all product groups over both three months ahead and one year ahead horizons vis-a-vis the previous round of the survey. The survey was conducted in 18 major cities and the results are based on responses from 5,805 urban households.
Agriculture and farmers’ reforms:
As per the first advance estimates, total food-grain production in the country is estimated at 140.57 million tonnes (MT) in 2019-20. The production during 2019-20 is higher by 8.44 MT than the average food-grain production of previous five years’ (2013-14 to 2017-18). Total production of kharif rice during 2019-20 is estimated at 100.35 MT. It is higher by 6.80 MT than the five years’ average production of 93.55 MT. Production of kharif nutri / coarse cerealsis estimated at 32.00 MT. It is higher by 1.01 MT than the production of 30.99 MT achieved during 2018-19. Total kharif pulses production during 2019-20 is estimated at 8.23 MT. It is higher by 1.00 MT than the five years’ average production of 7.23 MT. Total kharif oil seeds production in the country during 2019-20 is estimated at 22.39 MT which is higher by 1.11 MT than the production of 21.28 MT during 2018-19.
The production of oilseeds during 2019-20 is also higher by 2.17 MT than the average oilseeds production. Total production of sugarcane in the country during 2019-20 is estimated at 377.77 MT. The production of sugarcane during 2019-20 is higher by 27.99 MT than the average sugarcane production of 349.78 MT. Production of cotton estimated at 32.27 million bales (of 170 kg each) is higher by 3.56 million bales than the production of 28.71 million bales during 2018-19.  Production of jute & mesta estimated at 9.96 million bales (of 180 kg each) is higher than the production during 2018-19.
In the upcoming budget, farm experts have pitched for removing of GST on agri-inputs, revamping crop insurance scheme, considering land lease rental for fixing MSP and banning futures trade in agri-commodities. They also pitched for measures to promote organic farming, cut import duty from 30% to zero on live embryo, animal and semen, tweaks in electronic National Agriculture Market (e-NAM) and revisiting Food Security Act. Moreover, they demanded that the Pradhan Mantri Fasal Bima Yojana should be replaced with a new crop insurance and compensation scheme or set up a farmers disaster and distress relief commission. The farm experts also emphasized the need for expansion of multi-dimensional research in agriculture sector for the development of new technologies and further suggested for promoting start-ups at the institutes of the Indian Council of Agricultural Research (ICAR) and agriculture universities for young students.
Job Creation:
Job creation is likely to be one of the key thrust areas for the government in the budget, as it looks to spur employment generation. Growth is the most important along with creating jobs basically. The Employees' Provident Fund Organisation (EPFO) data showed that net employment generation in the formal sector is declining. As per the latest data, 7.39 lakh jobs were created in October 2019 as compared to 9.48 jobs created in September 2019. The data also showed that 4.37 lakh jobs were created in the same month last year, while 9.48 lakh EPF subscribers were added in September 2019.
Around 1.32 crore new subscribers were added to social security schemes of the EPFO from September 2017 to October 2019. This indicates that these many jobs were created in the formal sector over the past 26 months. Of this, 15.53 lakh jobs were created between September 2017 to March 2018. A net of 61.12 lakh jobs were created in FY19, while 55.64 lakh jobs have been created in current fiscal till October 2019. The average EPFO enrolment stood at 5.08 lakh, while it has been experiencing declining trend for the last three months.
However, the EPFO revised its payroll data for September 2019 slightly downwards by 49,516, against the earlier estimate of 9.98 lakh released earlier. In 2019-20, the highest number of 9.72 lakh net jobs was created during the month of July, while the least number of 5.22 lakh jobs was created in May. In the current fiscal, the sharpest revision was reported in August 2019, which showed contraction or exit of 97,169 members from the EPFO subscriptions. Besides, the EPFO said the economic slowdown has adversely impacted employment generation in the country as nearly 16 lakh less jobs are projected to be created in FY20 as compared to 89.7 lakh fresh jobs in FY19.
GST Structure:
The total Goods and services tax (GST) collections during December 2019 has increased by 9% to Rs 1,03,184 crore from Rs 94,726 crore a year earlier, the second month in a row when collections were above Rs 1 lakk crore. This is largely because of steps taken to increase compliance and check evasion. Of the gross Rs 1,03,184 crore in December 2019, Central GST (CGST) is Rs 19,962 crore, State GST (SGST) is Rs 26,792 crore, Integrated GST (IGST) is Rs 48,099 crore (including Rs 21,295 crore collected on imports) and Cess is Rs 8,331 crore (including Rs 847 crore collected on imports).  The total revenue earned by central government and the state governments after regular settlement in the month of December, 2019 is Rs 41,776 crore for CGST and Rs 42,158 crore for the SGST.
For 2019-20, the GST collection target has been budgeted at Rs 13.71 crore. The government proposes to collect Rs 6.10 lakh crore from CGST and Rs 1.01 lakh crore as compensation cess. The IGST balance has been pegged at Rs 50,000 crore.
In the upcoming budget, the government is planning to reduce the number of GST slabs to three from the existing number of four. It is also mulling a marginal increase in the current GST rates for some key items phase-wise to boost the tax mop-up. The government may also review around 150 products that are currently exempt from GST. Besides, it is likely to signal the inclusion of jet fuel and natural gas under the ambit of GST to reduce multiplicity of taxes and improve the business climate. The government is likely to cut GST on vehicles by 10% to bring it down to the basic slab of 18% from the existing 28%.
Current account deficit:
India's current account deficit (CAD), a difference between foreign exchange inflows and outflows, narrowed to 0.9% of gross domestic product (GDP), or $6.3 billion, in second quarter of current financial year (Q2FY20), on account of lower trade deficit. It had stood at 2.9% of GDP, or $19 billion, in the corresponding quarter of 2018-19. On a sequential basis, CAD had printed 2% of GDP, or $14.2 billion, in the June 2019 quarter. The contraction in the CAD was primarily on account of a lower trade deficit at $38.1 billion as compared with $50 billion a year ago.
During the first half of the FY20, CAD narrowed to 1.5% of GDP from 2.6% in the corresponding period in 2018-19, on the back of a reduction in the trade deficit, which shrank to $84.3 billion as compared with $95.8 billion a year ago. Besides, the balance of payment stood at $5.12 billion in the second quarter and $19.10 billion during the first half of this fiscal. Net foreign direct investment stood at $7.4 billion, almost the same level as in second quarter of 2018-19.
India’s CAD is likely to shrink further to $4-6 billion in Q3 of FY20 (and print at 0.7% of GDP) from $16.9 billion in Q3 FY19, on the back of the YoY correction in crude oil prices as well as subdued domestic demand.
Outlook and expectations:
Finance Minister Nirmala Sitharaman will present the first full year Budget after Prime Minister Narendra Modi’s National Democratic Alliance government returned to power in May 2019. The government is expecting an economic revival in the coming quarters as fundamentals of the Indian economy were strong and it has all the capacity to bounce back. Sectors like tourism, urban development, infrastructure, and agri-based industry had great potential to take forward the economy and for employment generation.
In the upcoming budget 2020, the government will focus on achieving the $5-trillion mark for the economy, job-oriented growth with a focus on manufacturing and services, transparency of fiscal arithmetic, monetary transmission, government’s fiscal prudence and fiscal stimulus, the revival of non-banking financial companies (NBFCs) and inflation targeting. The finance Minister will also be focusing towards investment, streamlining policy matters and faster resolution of policy issues, fiscal management, reforms in the power sector, focus on long-term reforms, simplification of GST, Direct Tax Code reforms, securing supply chains for economy, land and labour reforms, enhancing rural demand and improving oversight of financial markets.
Moreover, the government is considering a proposal to extend further incentives to salaried taxpayers in the upcoming budget. The Finance Ministry may allow individual taxpayers to pay a lower flat rate of tax if they forego all exemptions. Given the cyclical and structural slowdown, the government is also likely to deliver boost to consumption and demand. This means many things, but primarily one major shift in priority, from fiscal deficit targeting to boosting expenditure. The finance minister should announce a fiscal holiday in 2020-21 and focus on big-bang spending.

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