FM’s budget gamble to bet big amid low gains leaves little to add up

The markets seem to be disappointed not only by the absence of any measures on LTCG but could also have been spooked by other reasons including a proposed tax for NRIs.

Nirmala Sitharaman budget finance revenue
Union Finance Minister Nirmala Sitharaman with Economic Affairs Secretary Atanu Chakraborty (R) during the post-budget press conference in New Delhi, Saturday. (PTI Photo)

The whole is greater than the sum of its parts — Aristotle.

In other words, when individual parts are added together to form an entity, they are worth more than the parts in silos. This seems to be the adage and theme that our Finance Minister Nirmala Sitharaman has chosen for Budget 2020.

That is what could arguably be said about a tough budget preparation exercise that chose small incremental changes across a whole gamut of sectors over a single big-bang reform agenda.

Major announcements included cuts in personal income tax, extending tax benefits for affordable housing and relief to companies on payment of dividend.


To boost growth, Sitharaman announced higher spending on infrastructure, rural development and agriculture sectors. She also proposed a 16-point action plan to boost agriculture and ensure farmers’ welfare.

“Agricultural services need copious investments,” she said, adding the government has insured 6.11 crore farmers under the Pradhan Mantri Fasal Bima Yojna.

But it has to be seen if these well-intentioned measures add up to give the economy a shot in the arm that it badly requires in order to boost consumption so that the economy can get out of its worst slowdown in 11 years.

Also read | In Budget, FM flirts with inflation to deliver growth

Although the current slowdown that the economy is facing was not mentioned or acknowledged in the budget speech, the annexure document of the budget on the Macro-Economic Framework does mention “a temporary moderation in the GDP growth for 2019-20”.

However, the FM in the speech did go on record to say that the economy would grow in nominal terms by 10% going forward. Nominal GDP is GDP evaluated at current market prices. Therefore, nominal GDP will include all of the changes in market prices that have occurred during the current year due to inflation or deflation.

Considering the current inflationary environment (the CPI numbers breached the RBI safety value of 4% and is at 7.1%), this would mean that the GDP in real terms would be much lower, possibly even as low as 3%.

This would make the ambitious plan of reaching a $5 trillion economy by 2024 a pipe dream.

Revenue and expenditure 

The Budget 2020 forecast a generous increase in receipts — gross tax revenue is projected to grow at about 11% at ₹24 lakh crores of which corporate taxes are expected to grow by 11% to ₹6.8 lakh crores, income tax by 14% to ₹6.38 lakh crores and GST by 12% to ₹6.9 lakh crores.

This might be extremely ambitious considering that in the present fiscal, the government’s receipts is anywhere near its targets. Overall, the government receipts was estimated to be ₹30 lakh crores of which capital receipts is ₹10 lakh crores.

That the government has forecast an increase in personal income tax by 15% in spite of foregoing about ₹40,000 crores implies that the government expects an increase in the tax base, thanks be to the trust of the citizens and based on the proposed statute in income tax which promises to make the entire process of filing tax easier.

Tax experts, however, differ. “The proposal given in the finance bill is cumbersome like Duckworth-Lewis method in cricket and requires a lot of calculations,” says Krishnan, a tax auditor.

Offering an optional lower rate of income tax to individuals, the finance minister proposed new tax slabs of 10%, 15% and 25% in addition to the existing 5%, 20% and 30%. The new I-T slabs would be for individuals not availing deductions or exemptions.

As before, annual income up to ₹2.5 lakh is exempt from tax and those earning between ₹2.5 lakh and ₹5 lakh will pay 5% tax. Income between ₹5 lakh and ₹7.5 lakh will be taxed at 10%, while those between ₹7.5 lakh and ₹10 lakh at 15%.

Those earning between ₹10 lakh and ₹12.5 lakh will pay tax at the rate of 20%, while those earning between ₹12.5 lakh and ₹15 lakh will pay 25% tax and those earning above ₹15 lakh will be taxed at 30%.

According to the annexure memorandum on direct taxes, Individuals who opt for taxation under new rates will not be eligible for deductions including under Section 80C and 80D, LTC, housing rent allowance (HRA), deduction for entertainment allowance, professional tax, and interest on self-occupied/vacant property.

Also read | The new tax slabs unveiled in Budget

Currently, annual income up to ₹2.5 lakh is exempt from I-T. While a 5% tax is charged for income between ₹2.5 lakh and ₹5 lakh, 20% for income between ₹5 lakh and ₹10 lakh and 30% for those earning above ₹10 lakh.

“The new tax regime shall be optional for taxpayers,” the Finance Minister said.

“The proposed tax structure will provide significant relief to taxpayers and more so to those in the middle class,” she noted.

With her post-2019-20-budget corporate tax cut causing a further deficit of ₹1.45 lakh crore in government tax revenues, the minister hiked the fiscal deficit target to 3.8% of GDP for the current fiscal, from 3.3%. The escape clause in the FRBM Act was invoked for this purpose.

For 2020-21, she pegged the fiscal deficit at 3.5%. The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government. In government accounting, while calculating the total revenue, borrowings are not included.

Overall the government expenditure for FY 2021 has been budgeted at ₹30.4 lakh crore, which is an increase of about 11% over the revised estimates 2019-20. Interest payments at ₹7 lakh crores (which accounts for an increase of about ₹83,000 crores) and defence expenditure of about ₹4 lakh crores form the bulk of these expenditures. The higher interest provisioning is mainly on account of interest on market loans and interest on securities issued to public sector banks.

Decline in MNREGA, food security

The budget estimate of the government’s flagship security net programme has been budgeted at ₹61,500 crores for 2021. This is 13% lower than the current year’s revised estimate of ₹71,000 crore.

Considering that schemes like MNREGA not only act as a safety net in the form of rural job creation but also as an important driver of rural consumption, such a move could be considered as a damper in the current economic climate especially in the context of a rural slowdown.


The food subsidy has seen a steep decline compared to last year’s budget. In 2019-20, budget estimates ₹1,84,220 crore were allotted for the same which went down to ₹1,08,688 crore in the revised estimates of the same year.

However, the food subsidy saw a marginal increase of just 6.3% in the current year’s allotment at ₹1,15,569 crore has been allotted for the food subsidy.

Fertilizer subsidy too has faced the loss of around 10.8% of its funds compared to last year’s budget. The budget estimate of fertilizer subsidy for the year 2020-21 is ₹71,309 crore with the decline of ₹8,688 crore compared to 2019-20 budget.

LPG subsidy is hiked by 9.3% for 2020-21. It stands at ₹37,256 crore compared to ₹34,085 crore in the last budget. The kerosene subsidy has been cut off by ₹824 crore and stands at ₹3,659 crore. Interest subsidy under PMAY (Rural) scheme has also been reduced to ₹100 crore compared to ₹384 crore in revised estimate of 2019-20. Subsidies to PSU shipyards and private sector shipyards increased manifold. The allocation for the same shot up to ₹151 crore. It was mere ₹42.4 crore in the last budget.

Thumbs down from markets

After the budget was presented, the Sensex plummeted over 900 points to sink below the 40,000 level to 39,805.61 in late afternoon trade on Saturday, tracking a massive selloff in capital goods and financial stocks.

Similarly, the 50-share NSE Nifty plunged 248.05 points to 11,714.05. The markets seem to be not only disappointed with the absence of any measures on LTCG but might also have been spooked by other reasons including a proposed tax for NRIs.