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Road Map for Structural Reforms in Budget 2019
There were great expectations of fast-tracking reforms in the budget. However, it disappoints in setting a road map for creating a virtuous cycle of investment and growth. On the fiscal front, the overambitious revenue projections raise questions of credibility and feasibility of containing the deficits at the budgeted level. The wait for banking and financial sector reforms continues. The selective increases in import duties are retrograde, and increase in the taxes on the super-rich complicates the tax system without much gain in revenues. The centralisation through the levy of surcharges does not match the lip service given to cooperative federalism.
The union budget presented on 5 July was against the background of a difficult international environment and slowing domestic economy. The International Monetary Fund (IMF) in its July forecast for 2019 has lowered the growth rate of global output to 3.2% with downside risks. The United States (US) growth is pegged at 2.6%, the euro area is estimated to grow at 1.3%, and the estimate for the advanced economies taken together is 1.9%. The growth rate in the emerging and developing economies group is also subdued at 4.2%. The increasing trade tensions and tariff increases between the US and China, the uncertainties caused by the Brexit in Europe, and the adverse impact of the US sanctions on Iran and Venezuela have caused much uncertainty about the global economy.
On the domestic front, the economy has shown a continuous slowdown with the last quarter gross domestic product (GDP) growth estimated at 5.8%, the lowest in the last five years. There has been a steady decline in the rates of savings and investment since 2008–09, though it has shown signs of bottoming out. The twin balance sheet crisis continues to cripple the investment climate. The manufacturing sector gross value added (GVA) growth was a low 3% in the last quarter and as the capacity utilisation rate was already high, the acceleration in growth can be achieved only with additional investments. The current account deficit has shown a steady increase from 1.9% in 2017–18 to 2.6% in the first nine months of 2018–19. The agricultural sector is facing distress and micro, small and medium enterprises (MSMEs) are yet to recover from the twin shocks of demonetisation and suboptimal implementation of the goods and services tax (GST). The exports have been stagnant and in fact, have shown a decline in dollar terms. The withdrawal of the Generalised System of Preferences (GSP) by the US comes as an additional setback. Among other growth engines, even private consumption expenditure which had shown a strong growth momentum last year has been slowing down. The fiscal constraints have curbed the growth of government consumption from 15% in 2018–19 to 9.2% in the current year. In addition, the unemployment rate at 6.2% was the worst since 1972–73.
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