Budget 2019-20 has unravelled sooner than normal for Central government budgets. There is no ‘conversation’ among the people about this or that proposal. The super rich (6,467) are bitter but silenced by fear. The rich are relieved that they have been spared. The middle class is disillusioned because only new burdens have been put on them. The poor are resigned to their fate. The mid-size corporates (4,000) are counting the crumbs thrown at them.
The only ones actively discussing the Budget are the economists and the editorial writers — and both are contemptuously ignored by the Central government. (The Finance Minister has barred journalists from entering the Ministry of Finance except by prior appointment!)
Which Engine is Firing?
The government has promised to deliver 7 or 8 per cent growth of GDP in the year 2019-20. It is not just a difference of 1 per cent. It is the difference between continued moderate growth and potentially accelerated growth. It is also an indication that the Economic Division under the Chief Economic Adviser does not talk to the Budget Division under the Finance Secretary. Most observers have noted that there was no indication in the speech whether the government is content with moderate growth (7 per cent) or is aiming at high and accelerated growth (8+ per cent). I suspect it is the former.
High and accelerated growth requires all four engines of growth to be fired up and running at full throttle. Exports (merchandise) crossed the mark of USD 315 billion — set in 2013-14 — only in 2018-19 and, even then, the growth rate was a modest 9 per cent over the previous year. Government expenditure on the revenue account (net of interest payment and grants) was only 7.18 per cent of GDP in 2018-19. Private consumption depends on a number of imponderables including expectations about inflation, employment, economic disruption, security, etc. The perennial dilemma before a householder is ‘shall I save or shall I spend’? For example, it is the decline in private consumption that has hit so hard sales of automobiles and two-wheelers.
Investment is Stagnant
That leaves Investment. The Economic Survey put its faith on the engine of investment and, to a lesser degree, on private consumption. The usual measure of investment in an economy is Gross Fixed Capital Formation (GFCF). The Table tells the story under Modi 1.0 government:
GFCF had declined by nearly 5 percentage points from the high of 32.9. It was stagnant at around 28 per cent for three years and recovered slightly to 29.3 per cent in 2018-19.
GFCF will increase if public investment and private investment increase substantially. Public investment depends upon the ability of government to raise tax revenues but that ability has come under a cloud. In 2018-19, the government ‘lost’ Rs 1,67,455 crore out of the revised estimates of net tax revenue. The estimated growth rates for tax revenue in 2019-20 are, to put it politely, shockingly ambitious. Does anyone believe that Income Tax revenue will increase by 23.25 per cent or that GST revenue will increase by 44.98 per cent?
Private investment depends on corporate savings and household savings. Besides, investment is a matter of faith. If corporates do not make or do not expect to make adequate profits and do not re-invest the profits or if household savings are stagnant, private investment will not rise. Corporate profits depend upon a number of factors that are not under the control of corporates. As regards household savings, I found nothing in the Budget that would enthuse households to save more and channelise those savings into investments. If anything, more burdens have been put on households, especially the middle class, by raising prices of petrol and diesel, continuing with long term capital gains, taxing buyback of shares, and imposing higher Custom duties on newsprint, books, split air conditioners, some automobile parts, silver and gold. If the GFCF is stagnant, and assuming there are no dramatic improvements in productivity or efficiency, there will not be a significant rise in the rate of growth of GDP.
No Structural Reforms
The Budget speech uses the phrase ‘structural reforms’ in two places but there is no reference to any measure that could be regarded as structural reform. It confirms my view that Mr Narendra Modi is not a bold reformer in the mould of a Dr Manmohan Singh. He is conservative, protectionist, not a believer in free trade and a votary of the tax-and-spend policy. His positions are remarkably similar to those of President Donald Trump, except on taxation.
The government seems satisfied with moderate growth of about 7 per cent. Seven per cent growth will be totally insufficient to create wealth or enhance welfare. Seven per cent growth will not generate the millions of jobs that are required. Seven per cent growth will not raise the per capita income of the lowest deciles (the bottom 20 per cent) of the population. Seven per cent growth may win India the certificate of being among the fastest growing large economies of the world but that will mean little or nothing to the very poor, the unemployed and the neglected, vulnerable and exploited sections of the people.
This article first appeared in the print edition on July 14, 2019 under the title ‘Across The Aisle: Trapped in 7 per cent growth’