In a democratic country, it is always difficult to assess the national budget. Generally, the budget is painted black or white depending on which side of the floor the person sits. The same budget can be just what the doctor ordered from one point of view and very bad medicine from the other. Generally, all budgets come in various shades of grey, with some good parts and some disappointments. The 2019 budget presented by Nirmala Sitharaman is no different. It has strengths as well as weaknesses. It is not my intention to analyse this budget at length. I will attempt only to point out certain features and some issues which, to me, seemed interesting.
The Finance Minister in her opening remarks, states that, “it is well within our capacity to reach the US$ 5 trillion in the next few years.” Since it is already now at a level of US$ 2.7 billion this should happen as a matter of course. However, the FM, in her budget speech did not specify a time period; she merely said US$ 5 trillion will be achieved in a “few years”, which is a more circumspect way of putting it. The Economic Survey, however, states that given a real GDP growth rate of 8% and a rate of inflation of 4%, this could be achieved by 2024-25. However, the indicators of the economy do not presage a remarkable turnaround that will send us galloping forward. The Reserve Bank, in the Minutes of the Monetary Policy Committee meeting held in June 2019, clearly pointed out some of the headwinds that we presently face. Global economic activity, they said, has been “losing pace” and “industrial production and retail sales have been weakening worldwide, financial markets are” driven by uncertainty. In the domestic economy, GDP growth rate declined sharply to 5.8% in the last quarter of 2018-19, gross fixed capital formation fell to 3.6%, exports declined relative to imports, Rabi production declined marginally , growth in eight core industry sectors fell and there was “moderation in activity” in the services sector. Overall, as the Governor of the Reserve Bank put it, “growth impulses have clearly weakened.” This is the base situation from which the economy has to pull itself out. Has the budget done enough to give a growth impetus? The Economic Survey elaborately describes a theory that the economy remains in constant disequilibrium, fluctuating between virtuous cycles and vicious cycles. “ By averaging across 62 episodes of growth spurts, “ it says, “ Sandri (2014) demonstrates that productivity growth across these episodes is combined with a rapidly rising investment rate and an even more steeply increasing savings rate.” Investment and savings rates in China, the Survey states, reached about 45% in 2017. Where do we stand in comparison? According to an appraisal of national accounts aggregates, published in the RBI Bulletin of March 2019, gross domestic savings in India declined from 34.6% of GDP in 2011-12 to 30.5% in 2017-18. Gross capital formation, investment in capital assets, declined during this period from 39% to 32.3%. Public investment in capital formation becomes essential when private investment is low.
A study by the Centre for Monitoring Indian Economy showed that Indian companies announced new projects worth ₹1 trillion in the quarter ending December 2018, which was 53% lower than in the preceding quarter and 55% lower year on year. There was a decline of new project announcements also - 62% in the private sector and 37% in the public sector. Investment decisions in the private sector are driven by demand. A number of measures already taken by the Government, such as income support to farmers, increase in procurement prices of food grains and tax relief to those earning up to Rs. 5 lakhs have put more money in the pockets of consumers, which, over time, could raise consumer spending. Measures taken by RBI to improve liquidity and to lower interest rates should also raise demand and create confidence among investors. The thrust given to the rural economy in the budget – up gradation of traditional industries, promotion of rural entrepreneurship, investment in agricultural infrastructure, the establishment of new farmer producer organisations, greater freedom in marketing of agricultural produce - all these are measures that should promote consumption in rural areas. The efforts to substantially re capitalise public sector banks and to encourage them to provide more credit to well run non-banking finance companies should provide more liquidity in the system. The impact of reduction of corporate tax to 25% for companies with an annual turnover of ₹ 400 Cr is another positive move, even though the actual coverage in terms of output will be much less than the projected 99.3%. Although there are a slew of measures in the budget which could push up demand and create an atmosphere conducive to investment, a stronger thrust was perhaps required to take the country’s economy into a higher orbit.
Considering the state of the global economy and the sluggishness observed in the Indian economy, a strong public investment effort would have undoubtedly helped at this juncture. While substantial allocations have been made for road and railway infrastructure, an intensive stimulus to boost consumption and to promote investment is somehow lacking in this budget. Since the Government knows the sectors that are struggling in the current downturn, a determined effort to set them on a high growth path was expected. I do not know whether the Government is too fixated with the notion of keeping the fiscal deficit down to a level of around 3%. If they believe, as the Economic Survey does, that the economy alternates between virtuous cycles and vicious cycles, the policy imperative that it predicates would be flexibility in dealing with each situation. In the vicious cycle that now prevails, a stronger Governmental effort could have yielded more results a great deal faster. As Mark Mobius, Partner, Mobius Capital Partners, put it in an interview reported in the Economic Times (July 8th, 2019), “My main concern regarding the budget is that the government was a little bit too careful. I do not think a 2% or 3% debt to GDP level is appropriate for India. As you know, the US has 5% fiscal deficit as percentage of GDP and that is where India should be and India should not be afraid of that because it is a fast growing country and infrastructure is needed. You have to really get the Government spending in the right place and not be worried about the debt to GDP levels.” The budget has other positive features, not least among them being the further fillip given to startups and the clear foresight indicated in the measures proposed to promote electric and low carbon emission mobility. Indeed, the direction given to low emission mobility would make India a front runner in this key area. There has been some unpleasant fallout also, arising from measures such as higher taxation of high net worth individuals and its impact on stock markets and the further sharp increase in fuel prices, an area which the budget has failed to address seriously is the joblessness situation. The Periodic Labour Force Survey (2017-18) shows a decline in the absolute number of workers in employment from 467.7 million to 461.5 million . Overall unemployment rate is put at 6.1%, almost thrice as much as in 2012.
Another glaring omission I see in the budget speech is that there is no reference whatsoever to the introduction of a new Direct Taxes Code. The present Income Tax, amended multiple times year after year through a succession of Finance Acts, is perhaps the most complicated legal document in use in India. It is crowded with provisions, provisos to provisions and provisos to provisos. It is the ultimate happy hunting ground of lawyers, chartered accountants and officers of the CBDT at all levels. A great deal of work has been done over many years to simplify it and make it intelligible to citizens. The last such exercise was initiated by the former Finance Minister Arun Jaitley and I am aware that this exercise was completed. It is a pity that the work done by many competent people in the Department and outside and by successive Ministers has still not seen the light of day. The Modi Government, which believes in simplification of processes, should be the first to complete this long pending exercise.
In the final analysis, a budget is not a closure, it is only an estimation. The success of a Finance Minister will be judged not by the quality of the budget she presents, but by her capacity to be a good listener, her flexibility, and her ability to adjust to changing economic situations.
Former Union Cabinet Secretary, presently, Chairman, Centre for Development Studies, Trivandrum
(The facts and views expressed in the article are those of the writer.)