The 2020 Budget was presented against the background of slowing economy, poor investment climate, declining consumption demand and stagnant exports. The steady deceleration in growth, which registered at 4.5 per cent in the second quarter of the current fiscal — the lowest in the last 26 quarters — presented a challenge as well as an opportunity.
Monetary policy, by reducing the repo rate by 135 basis points since January last year, has traversed quite a distance. The Budget provided a great opportunity to propel the economy to lift consumption demand, revive the investment climate and accelerate growth by initiating structural reforms. The hope was kindled even more as the Economic Survey made a reasonably objective analysis of the slowdown and stated, “The government must use its strong mandate to deliver expeditiously on reforms, which will enable the economy to strongly rebound in 2020-21”.
Although over the years there have been differences of focus between the Economic Survey and Budget, the disconnect is much greater this year. While the Survey makes a detailed analysis to identify the causal factors and states, “A sharp decline in real fixed investment induced by a sluggish growth of real consumption has weighed down GDP growth from H2 of 2018-19 to H1 of 2019-20”, the Budget speech states, “the fundamentals of the economy are strong and that ensured macroeconomic stability”. Not surprisingly, when the existence of the problem itself is denied, it is difficult to find solutions.
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The Budget speech by the finance minister ran for over two-and-a-half hours, until she could not carry on any longer. Unfortunately, it fell short. It did not contain what is required to revive the investment climate and growth. In fact, most of what she read in the Part A related to the subjects that come within the constitutional domain of the states and the action will have to be taken by them. Even with respect to subjects like agriculture, irrigation and rural development, a careful analysis reveals that the allocations appear higher mainly in relation to the sharply reduced expenditures in 2019-20.
Not surprisingly, the market response to even the measures like an increase in insurance cover for bank deposits, reduction in individual income tax rates and abolition of dividend distribution tax was not very enthusiastic.
The hope was that there will be a substantial increase in infrastructure investment, which in turn will trigger investment demand, but the actual allocations are not promising. This was particularly surprising in the wake of the recent announcement that there will be an investment of Rs 103 trillion in the next five years to leapfrog India to a $5-trillion economy. Much of the investment for this will have to be made by the private sector and it is hoped that the allocation of Rs 20,000 crore in equity in specified infrastructure finance companies will help them to leverage more than Rs 1 lakh crore of investment support.
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The budgetary allocation for capital expenditure for the current year, which is estimated at 1.7 per cent of GDP this year, is budgeted at 1.8 per cent in 2020-21. This is not very different from the past trend. The Budget also contained 16 action points on agriculture, irrigation and rural development and the Rs 2.83 lakh crore allocation is higher than the budget estimate for the previous year by just 2.5 per cent and revised estimate by 13.2 per cent. In other words, the allocation looks impressive only because there was a massive cut (Rs 26,000 crore) in the budget estimate over the revised estimate. Similarly, the allocation to transport infrastructure in the Budget — at Rs 1.7 lakh crore — is just 7.6 per cent higher than the revised estimate for 2019-20. Not much is expected in terms of propping up the consumption demand and the allocations to schemes like the MGNREGA has been cut from Rs 71,002 crore (RE) in the current year to Rs 61,500 crore in 2020-21 and for schemes like PM Kisan Samman Nidhi, it is just as much as was budgeted for 2019-20.
The slippage in fiscal deficit from the target set in the budget estimate in 2019-20 was expected. This is mainly because: Nominal GDP growth was 7.5 per cent as against the estimated 12 per cent in the budget; overestimation in the growth of tax revenue at 18.3 per cent over the pre-actuals of the previous year and the slippage in achieving the disinvestment target of Rs 1.03 lakh crore. Thus, it is not surprising that the fiscal deficit for the current year stands estimated at 3.8 per cent of GDP and for the next year at 3.5 per cent. The major concern is that the reported off budget financing is almost 0.85 per cent. This does not capture the bills and refunds payable by the government.
There are also questions about whether the revised and budgeted estimates would be realised. The disinvestment revenue is estimated at Rs 65,000 crore though the realisation so far has been just Rs 18,000 crore, which implies another Rs 47,000 crore will have to be mobilised in the next two months. Also, the RE of tax revenue for the current year is over 14 per cent higher than the actual for 2018-19 and this is perhaps predicated on the hope that the scheme, “Vivad se Vishwas”, which allows the settlement of disputed tax to be paid without interest and penalty.
On tax reforms, while the abolition of dividend distribution tax was expected, the reforms in individual income tax complicates the tax by creating six brackets. The best practice approach to tax reform is to broaden the base, reduce the rates and reduce the number of brackets to make it a simple tax. Clearly, the main objective of any tax is to raise revenue. The government could have simply phased out the tax concessions, indexed the brackets for inflation and reduced the rates of tax with appropriate adjustment in the brackets. Raising of customs duties is clearly retrograde.
Rather than integrating the economy with global value chains and making it competitive, it takes us back to the import substitution era in the name of “Make in India”.
The impact of fiscal developments on the states’ finances is clearly adverse. The shortfall in tax devolution in 2019-20 from the budgeted amount works out to Rs 1.53 lakh crore and the total shortfall in transfers amounted to Rs 1.41 lakh crore. Besides starving funds for various projects, this has serious repercussions on budget management at the state level. It seems the wait for a rescue of the slowing economy has become longer.
This article first appeared in the print edition on February 4, 2020 under the title “No rescue in sight.” The is former director, NIPFP and member, Fourteenth Finance Commission.
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