If the Budget is defined as an annual financial statement of the government—a statement of its estimated receipts and expenditure for the forthcoming year—there was little of that in the little more than two hour speech of the new and first woman Finance Minister, Nirmala Sitharaman. Instead, what we heard was a roadmap and a broad framework of policy initiatives to take India into the exclusive $ 5 trillion club in the next few years.  And not by 2025, as was predicted by her advisor, Krishnamurthy Subramanian, only a day before.

In fact, important numbers like the government’s total revenue and expenditure, market borrowings and interest receipts, important indicators of the health of the economy, were left to be read in the fine prints of the Budget documents. Perhaps they did not seem important enough.  However, among the few numbers trotted out were ₹70,000 crore for recapitalisation of the banks, ₹10,000 crore for the electric vehicle (EV) project and the government’s fiscal deficit target of 3.3% of the GDP—a .1% reduction from what was proposed in the Interim Budget in February.

More importantly, the Budget FY20 followed the chief economic advisor’s line of thinking—of moving away from the current consumption-led growth story to a more sustainable investment-led one. But the funding, unlike in the past five years, is unlikely to come from the government’s pocket (read expenditure Budget), but from private players, foreign investors, both dealing in portfolio and long-term projects and retail investors.  It also did not preclude the highest-ever bonanza of ₹1.05 lakh crore from disinvestment proceeds.

No wonder then, the government’s earlier strategy of crowding in private investments through its own higher spending initially no longer seems to find favour with Modi 2.0. Perhaps it has something to do with the Controller-General of Accounts pegging the tax revenue shortfall of ₹1.67 lakh crore in FY 19. Today, the government is talking about public-private partnership model, especially in large infrastructure project, as the new model going forward.

Hence, the Finance Minister spelled out a slew of measures to lure foreign investors into the country.  After all, putting the right infrastructure in place calls for an investment of ₹100 lakh crore in the next five years, which cannot be funded by the government alone.  So Sitharaman has promised to rationalise and streamline the existing Know Your Customer (KYC) norms for foreign portfolio investors (FPI) and make it “more investor friendly without compromising the integrity of cross-border capital flows”.

Realising that NRI investment in Indian capital markets is way below its actual potential, the finance minister has decided to provide Indians staying abroad with seamless access to the Indian equities market. “I propose to merge the NRI-Portfolio Investment Scheme Route with the Foreign Portfolio Investment Route,” she stated, amid much thumping of the desk. It also proposed an increase in the statutory limit for FPI investment in a company from 24% depending on the sector, and also permitting them to subscribe to listed debt securities issued by real estate investment trust (ReITs) and investment infrastructure trusts (InvITs).

The government has also decided to raise a part of its gross borrowing programme from the overseas markets like dollar-denominated bonds and in other currencies, which, as  Edelweiss Securities economist Madhavi Arora says, would reduce the pressure on domestic sources of financing in medium term. “This will also have a beneficial impact on demand situation for the government securities in domestic market,’’ says Arora.

To boost  economic growth and to make its flagship project Make in India a success, the government plans to invite global companies through a transparent competitive bidding to set up mega-manufacturing plants  in sunrise and advanced technology areas. These include semi-conductor fabrication (FAB), solar photo voltaic cells, lithium storage batteries, solar electric charging infrastructure etc. These companies will be given tax exemptions and other indirect benefits based on the investment made.

Strategic sale of central public sector enterprises will play an important role in financing India’s needs. The government has decided to set an all-time sell-off target of ₹1.05 lakh crore, by divesting its stake in many state-owned entities. It has decided to reduce its stake to less than 51% in non-financial public sector undertaking on a case by case basis. It has also decided to modify the present policy of retaining 51% government stake to retaining 51% stake inclusive of the stake in government-controlled institutions.

Budget FY20 has also increased public shareholding in public listed companies from 25% to 35%.

The government hopes that public participation in the capital markets is going to help raise funding. Hence it plans to initiate steps towards creating an electronic fund raising platform—a social stock exchange—under the regulatory ambit of Securities and Exchange Board of India (SEBI) for listing social enterprises and voluntary organisations working for the realisation of a social welfare objective. The point is to allow these organisations to raise capital as equity, debt or as units like a mutual fund.

However, the real question is why is there a change in the government’s strategy. Perhaps it is as much to do with the current economic slowdown in the economy as its not-so-robust finances.

More importantly, how has it managed to keep its fiscal deficit target at 3.3% of the GDP, while having a tax revenue shortfall of ₹1.67 lakh crore? The finance ministry has done it through fine balancing act. While poor income tax and goods and services tax collections have forced the government to cut down its estimates (₹51,000 crore less from income-tax collection and ₹97,000 crore from its earlier estimate), it has added ₹40,000 crore to its excise duty collections in FY20. Further balancing has been achieved by projecting a higher dividend from the RBI and more proceeds from the spectrum sale, not to mention the huge amount from the disinvestment process.

Questions, however, are being asked about the balancing act itself. “We believe it will be a struggle as the revenue assumptions do look optimistic,” say economists Sonal Varma and Aurodeep Nandi of Noumra, adding that the government has assumed higher nominal GDP growth. “Given our view of lower growth, tax buoyancy is likely to disappoint and will require expenditure pruning to meet the budgeted fiscal deficit target,’’ they add. However, the positive overall signal should supersede these concerns for now. Arora of Edelweiss believes that realistically, the government could undershoot the gross tax revenue by ₹1 lakh crore.

Adds Aditi Nayar, principal economist, ICRA, “the market will closely scrutinise the incoming trends for revenues, disinvestment proceeds and expenditures, to assess the evolving likelihood that the fiscal target of 3.3% of GDP for FY2020 will be achieved”. But what is most worrying is the increasing reliance of the government on off-balance sheet borrowing – Internal and Extra Budgetary Resources (IEBR) in recent years to fund its capital expenditure. The IEBR constitutes funds raised by central public sector enterprises such as Food Corporation of India, Power Finance Commission by way of profits, loans and equity.

While the IEBR is kept out of the fiscal deficit calculation, it will have to be paid back over time. In FY20, while gross budgetary support for capital expenditure is ₹3.38 lakh crore, the IEBR is a higher ₹4.4 lakh crore. Thus, the government’s financing model may not work as smoothly as expected because of the many bumps on the way, including a slowing global economy and a protectionist move from most regimes.

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