Budget big picture: Acknowledgement of a miscalculation, major steps to course-correct

Notwithstanding structural reforms over the past few years – such as the introduction of GST (intended to simplify the indirect tax regime), several ease-of-doing-business measures (such as the Insolvency and Bankruptcy Code), and a historic tax cut for companies in 2019 — the Indian economy had steadily lost momentum.

The biggest representation of this loss of momentum was a slowdown in personal consumption by the average Indian. That, in turn, was a representation of the tepid job creation in the economy.

Most new jobs being created are in the shape of women joining the workforce in self-employed categories of work that barely provide subsistence-level incomes. The Economic Survey showed that real wages for the self employed are still below 2017-18 levels.

Poor job creation was a consequence of a policy focus concentrated far too much on capital-intensive production, with very little attention paid to employment generation. For instance, labour intensive sectors such as textiles and leather industries or MSMEs continued to suffer while the government heavily subsidised big companies through Production-linked incentive (PLI) schemes.

It all went back to the Narendra Modi government’s economic philosophy that the private sector will be the real job creator in India, and the government’s primary role is to build physical infrastructure.

In this framework, disinvestment is seen as a reform, and giving up public sector units is seen to achieve greater efficiency in the market.

Poor outcomes of the government’s efforts

However, notwithstanding the government’s increased spending on building productive assets such as roads and ports, as well as the massive corporate tax cut to companies, the economy has not been able to break free. India’s GDP has grown at an average of less than 5% annually since 2019, and less than 6% since 2014.

Finance Minister Nirmala Sitharaman as well as the rest of the government have been exasperated that the private sector did not play along with the overall government strategy for growth. Once, the FM even asked if the private sector in India is like Lord Hanuman, unaware of its powers (to invest).

The government has been scratching its head about what to do to incentivise the private sector. Indeed, on paper, almost everything the government thought it should do has been done.

At last, a significant attempt at course-correction

Saturday’s Budget announcement of a potentially massive income tax break is an acceptance by the government that more than anything else, the private sector investments require robust consumer demand. Everything else — corporate income tax and interest rates and the condition of roads — is secondary.

With anger among its most loyal voters bubbling over, the government has finally bit the bullet for a income tax cut as a way to spur consumer spending. This is as much of an acceptance as can be expected from the government that its corporate tax cut of 2019 has not worked.

The fact is that the 2019 move was poorly timed. If the sequencing was reversed — income tax cut first and corporate tax cut later — the results could have been very different.

The hope now is that consumers will spend the additional money in hand, and will provide the corporates the essential reason to invest in new capacities, create jobs, and further spur economic growth.

But there is still a crucial element lacking

However, there is a crucial element still lacking in this Budget: a comprehensive strategy for economic growth without which tax cuts will not be enough.

Tax cuts can provide an initial fillip, especially income tax cuts, but they cannot on their own sustain consumption if economic growth doesn’t happen.

Further, a very small substantive effect will be brought about through tax cuts — this is because very few people actually pay income tax. A much bigger impact will come from cuts in GST rates, which impact almost everyone.