Economic Survey sets the tone for Budget 2020

The Economic Survey presented a day ahead of the Union Budget each year is a routine document reviewing the key macros. However, this time around the Economic Survey has gone one step further and also outlined the major focus areas of the Union Budget along with a likely strategy that the Budget could employ. From an investor’s perspective, that gives lot more perspective about what to expect from the Union Budget 2020. Here are 6 key takeaways from the Economic Survey which could impact Union Budget 2020.

Fiscal relaxation looks likely
The Economic Survey has already hinted that sticking to the 3.3% fiscal deficit target may not be feasible. More so, considering that the government has already taken an Rs145,000cr hit on account of corporate taxes. In addition, direct and indirect taxes are well short of target this year. While 50 basis points relaxation up to 3.8% is acceptable as per the N K Singh Committee recommendations, the Union Budget will have to strike a trade-off between fiscal relaxation, sovereign ratings and spike in bond yields.

Lower GDP targets could trigger growth boost
The budget will surely have a growth boost considering that even the 2018-19 GDP growth has been scaled down from 6.8% to 6.1%. The question is whether the budget adopts a top-down approach or a bottom-up approach. A bottom-up approach would entail putting more money in the hands of the people via tax cuts and exemptions. However, the Thali analogy underlines that the government does not believe inflation has hit consumers. Also, the budget may be constrained on further tax cuts. Instead, the Budget 2020 may leverage capital markets to infuse more funds into infrastructure and other growth drivers.

Disinvestment could be the big story of Budget 2020
The government is likely to fall well short of its divestment target in the current fiscal, even assuming that Air India sale goes through. The need of the hour is not stiffer targets but an out-of-the-box approach. The Economic Survey has spoken about an approach akin to Temasek of Singapore. In this model, the government could divest its entire stake in PSUs to something akin to a sovereign fund and book the proceeds as inflows. Then the Temasek like agency either places these shares with institutional investors or uses the CPSE-ETF route. For the government, the inflows are front-ended, though valuations would largely depend on investor appetite.

From Make in India to Assemble in India
While Make in India was a good idea, it could not generate traction due to gaps in infrastructure, last mile delivery, logistics and policy. Economic Survey now talks about rewinding the Indian economy to the strategy that China had adopted 25 years back. Now India will focus on become the Assembly Line for the world and there will be more Samsungs and LGs using India as a manufacturing base rather than China. The idea is to adopt a more labour-intensive approach that hits two birds with one stone. It boosts exports and also creates more jobs. The contours of this policy will be interesting.

Shadow banks need a carrot and a stick
The Economic Survey acknowledges that the NBFCs are pivotal to the Indian economy as they are a bank for the unbanked and also provide last mile connectivity. However, a handful of NBFCs have gone overboard and created a systemic problem. Apart from bad lending practices, these NBFCs were also guilty of asset liability mismatch. The Economic Survey admits that NBFCs remain pivotal to growth and the Budget may look at quick measures to separate the wheat from the chaff and nurture the wheat.
Reduced direct government intervention
Finally, one big theme of the budget could be to reduce government role in business. That is almost like Margaret Thatcher saying, “Government has no business to be in business”. But that could be the underlying theme of the budget. The government has already spoken about reduced government involvement in agriculture and pharmaceuticals. It could mean possible private participation in agriculture but could also imply that food subsidies could now be off the budget and on the books of FCI. Pharma will now enjoy free pricing but government should not let usurious tendencies prevail.

Budget 2020 is going to be a classic case of reconciling tough differences. How it is done will depend on the tightrope skills of the finance minister.

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