I marvel at the genius of commentators and experts who are able to expound their views on TV channels even as the Budget Speech is being read out and, later in the day, confidently assert their opinions on the basis of the Budget Speech alone. To me, the Budget is more than just the Speech. It is the whole set of documents, which make sense only in their totality. Even as I write this piece, almost a week after the event, I am still not sure. The Finance Bill can contain within its fine print provisions and corrections which will be known only when their impact fully sinks in. The Explanatory Memorandum to the Expenditure Budget can contain twists and turns not immediately obvious. Some of the figures can be contradictory too. Sometimes it is difficult to decipher whether a figure mentioned relates to a demand made by departments or an actual budget provision. The revenue foregone statement, called by another name now, is based mostly on assumptions and conjectures. In fact, the Budget will unravel only through the year and may often be overtaken by totally unforeseen economic events like demonetisation and the corona virus.
The length of the Budget Speech amazed all. I do not recall ever having seen a longer Part B of the Speech, relating to taxation. This is all the more confounding, as the Central Government is no longer in control of the larger part of indirect taxation which is subsumed by GST, now decided by the GST Council.
At this point, it looks to me like a run-of-the-mill budget exercise, an attempt to balance conflicting objectives without effectively addressing either. On the one hand, there was the view pushed forward by orthodox economists of the Davos-IMF kind, urging caution in deviating even marginally from strict fiscal discipline. Then there were others, more grassroots economists and thinkers, who felt even more strongly that the economy was in such dire straits that nothing but a strong fiscal stimulus could bale it out. The Finance Minister chose to try and achieve both. She stretched the fiscal deficit to 3.8% in FY 20 and to 3.5% in FY 21, “consistent”, as she said, “with Government’s abiding commitment to macroeconomic stability.” On the other hand, she provided more funds for infrastructure and provided some conditional exemptions in personal income tax, hoping that these will suffice to create demand. She also provided more supply-side stimulus, in addition to the ₹ 1.45 lakh bonanza she had given to the corporates late last year and introduced more measures to benefit foreign investors.
This was one Budget the country awaited with bated breath. The GDP growth rate had gone down to 5%. The rate of growth of the construction sector, very often an indicator of economic health, had declined to 3.3%. Agricultural growth was at 2.1% and the auto sector has been crying out for help for long. The rate of domestic savings and of investment had fallen to levels considerably lower than even as late as 2012. MSMEs were in despair and the fall of this sector further exacerbated the problems of non-performing assets in banks and all round unemployment. The Human Development Report of 2019 showed that 44% of India’s population was below the poverty line and the incidence of absolute poverty, which had been declining continuously since 1972-73 jumped up by 4 percentage points to 30%. India’s position in the World Hunger Index has fallen to 112, as against Brazil at 18 and China at 25. Effective demand is low because the bottom of the pyramid, which should provide a sound and growing market, is becoming more and more impoverished. 73% of India’s wealth is owned by the richest 10%, while the bottom half of the population owns a mere 4.1%. [“Fashioning the Framework of a New India” by Indira Hirway, “The Hindu”, February 6th.]
It was, therefore, not unreasonable to expect that the Finance Minister would provide more purchasing power to the poorer sections of the people- farmers, workers, agricultural labourers and the like, who, collectively, will stimulate demand. The expectation was that a fiscal stimulus would be administered, as happened in 2008, which would lead to revival of demand, which, in turn, will stimulate production, enabling producers to make use of unutilised capacity and, in the medium to long term, encourage more green field investment. This was not apparent in the Budget and there was a deep sigh of disappointment all around that took the tangible form of a 900 point fall in the Sensex on that eventful Saturday.
There were other disappointments too. Despite the fall in fiscal deficit, revenue deficit, as percent of fiscal deficit, will rise from 63% this year to 77% next year. Besides, after including extra-budgetary borrowing by Central public sector undertakings, the FM herself stated that the overall fiscal deficit will be 4.5% this year and 4.36% next year. Government expenditure on welfare schemes this year revealed a shortfall of ₹ 88000 crore, including such schemes as PM Kisan (₹21000 crore) and PM Gram Sadak Yojana ( ₹5000 crore). The MGNREGA could have been used as a vehicle for pumping in resources into the rural sector by redesigning it to provide 200 days employment per year and providing a higher daily wage. Instead, the outlay for this scheme is lower next year by ₹9500 crore. Allocations for subsidy on food, fertilizers and petroleum products remain at the same level.
The States got a lower share of Central tax transfers this year, a decline of one lakh crore. The States could have spent more, had their borrowing limits been raised, but this demand has also been spurned. The Central tax transfers to States are projected to rise by 19% next year, but this again will depend on actual tax collection. The Finance Minister has also made it clear that GST compensation will be limited to actual compensatory cess collections by the Government of India. I wish the concept of co-operative federalism and “Team India”, espoused so ardently by the Prime Minister in the early years of his first tenure, gets a new lease of life now in the best interests of the country.
On the expenditure side, the major positive change is an 18% growth in budgeted capital expenditure, rising to ₹4.12 lakh crore in FY 21. However, total investment goes up only 2.4% to ₹10.84 lakh crore, raising doubts about the Government’s plan to spend ₹ 100 lakh crore in five years on infrastructure. There are plenty of good ideas such as emphasis on warehousing for agricultural products, solar energisation of pumps in agricultural use, setting up a national cold supply chain for perishable products, new forms of skill development, a fresh attempt at creation of a single window for industry through an Investment Clearance Cell. There is also a great deal of emphasis on new technology, on artificial intelligence, on setting up technology clusters. There are some curious ideas too, such as PPP in hospital development in backward districts. Since public health institutions and private hospitals function on entirely different parameters, how can the two be integrated? Likewise, when there is already excess power being generated in the country, is there scope for solar plants alongside railway lines or to provide farmers with the hope that their barren lands can be used for solar power generation? Besides, how will farmers’ incomes be doubled by 2022 when the present growth rate of the agricultural economy is only around 2%? Are we spending enough on education, health and social security ? Are we rethinking our approach to science and technology, expenditure on which still languishes at less than one percent of GDP?
On the revenue side, personal income tax rates were simplified and reduced at lower levels but these new rates would be available only if available exemptions are given up. She also said that in order to simplify an outmoded and complex income tax law regime, she would remove 70 of the 100 exemptions presently available. Whether the new slabs would actually mean more money in the hands of taxpayers in lower income groups would need careful study of the Finance Bill and calculation by professionals. At any rate, the impact of the tax concession estimated by her as ₹40000 crore, is too small to make any decisive difference to consumer demand. The movement of dividend distribution tax from companies to the recipients will create a higher burden on them, inducing retail investors to move away to forms of saving other than dividend paying equity shares. The lower tax rate of 15%, given to new manufacturing companies last year and new electricity companies in the Budget may not stimulate investment; it may lead largely to proliferation of new subsidiary companies. The increase in the residency period of NRIs in India to 240 plus days, and the subsequent clarification that it does not apply to workers and that it applies only to income earned in India from assets, still leaves the issue undecided and would need to be reflected in the Finance Bill before it is passed. The increase in customs duties of household goods, a move towards creeping protectionism which appears to be a global trend, could benefit fast moving consumer goods industries in the short run. There are measures to make the taxation system friendlier to taxpayers. This is a good development, if implemented in the spirit in which it is conceived, as harassment of taxpayers had reached alarming proportions in the last few years, leading even to suicide by a successful startup entrepreneur. The measures to encourage investment by foreign sovereign wealth funds in infrastructure and to provide more room to foreign portfolio investors and offshore funds are also positive. Since the FM has recognised that the income tax law is arcane and complicated, further delay in introduction of a simplified direct tax code is inexplicable.
Overall, I get the impression that the figures really do not add up. On the expenditure side, there are many areas, including Defence, subsidies and social welfare schemes, where provisions seem inadequate. On the revenue side, while gross tax revenue is estimated to grow only by 12%, which seems reasonable, the expectation that proceeds from disinvestment of central public sector undertakings will grow by 223% seems overly ambitious. So is the expectation that ₹ 1.33 lakh crore will accrue through adjusted gross revenues in the telecom sector, as the telecom companies are fighting hard in every forum to phase out their dues to keep the industry afloat. The actual fiscal deficit figure, therefore, may be higher than the projected 3.5%. Nor will the budget, as it is, provide the stimulus needed by the flailing economy. In the words of CRISIL, “In the absence of growth kickers, growth pick-up in fiscal 2021 is expected to be largely led by the base effect and supported by somewhat better farm income (led by a good Rabi crop) and the delayed impact of monetary easing. Critical to this forecast is the assumption of a normal monsoon in the next season and benign crude oil price.” The absence of a fiscal stimulus also casts a greater burden on the RBI and the banking system including, perhaps, giving some respite to banks in the recognition of non-productive assets and giving more time to the humongous task of cleaning up the banking system.
There are, however, two factors that could make the economic outlook more optimistic. First, there is the natural resilience of the Indian economy and its capacity to weather storms. An IHS Market survey in January showed signs of a turnaround, with the Purchasing Managers Index jumping up to an impressive 55, showing increasing confidence within industry, a new upsurge in both services and manufacturing, higher growth of employment. The second factor is the ability of this government to change track at any time during the year in economic policy making, as evidenced by such measures as demonetisation, imposition of GST and the deep corporate tax cut. The Budget may not, therefore, be the sole or even primary instrument in the hands of this government.
The months ahead will unfold the events that will shape the Indian economy. FY 21 is critical. We can go down in the dumps even further or we can miraculously rise again like Phoenix from the ashes.
The facts and views expressed in the article are those of the writer.