India’s middle class will count a few rupees, bank depositors will get a little security, privatisation enthusiasts will chew on a new player in the market. But other than high-sounding grandiose statements, India’s Budget 2020 has delivered no expectations. This was preordained, of course. So, if anyone is feeling disappointed, clearly s/he is not reading the economic signals in the economy or the approach of Narendra Modi’s government to it clearly. Finance Minister Nirmala Sitharaman had little room for manoeuvre. Her Budget shows how little. In a line: Budget 2020 is yet another wasted opportunity.
No analyst in her right mind anticipated that Sitharaman’s second Budget would deliver on-ground change and help kick-start the economy. But after the inspiring economic survey — a document that has zero-actionability but is one of the most read texts in reading the mind of governments — was tabled in Parliament on 31 January 2020, Indians expected more than lip service to wealth creation.
At a time when removal of hurdles before businesses is the crucial conversation and economic growth has been slowing down consistently (4.8% down from 6.1% projected by the IMF in October), the Budget, even if it did not yield immediate returns, should have signalled the government’s intent to reform. It should have addressed the series of crises that entrepreneurs have been facing, from real estate to finance to manufacturing to infrastructure. None of that happened.
Instead, the Indian government rattled on the same-old-same-old politics dominant sloganeering. So, aspirational India is defined by agriculture, irrigation, and rural development; wellness, water, and sanitation; and education and skills. Caring society focusses on women and child; social welfare; culture and tourism; and environment and climate change. And economic development is all about industry, commerce, and investment; infrastructure; and new economy. Of the three, only the last has the ability to turn the economy around.
What an economy generally needs from the government is to help catalyse entrepreneurial ideas and turn them into wealth, if not drive animal spirits. In this way, businesses build enterprises, create jobs and pay taxes for wealth redistribution. For Indian entrepreneurs, the expectation scale is even lower. All they seek is to reduce the administrative burden in doing business, from laws and rules to compliances and filings.
These reforms lie outside the Budget, and Minister Sitharaman has done well to list them out. The Investment Clearance Cell is yet another institution that this Budget creates. But if past track record is any indication, it will not “create more opportunities” and “remove road-blocks”. It will clear nothing but create another layer of bureaucracy. Likewise, with the five new ‘smart cities’. That she hopes to work with States to create them is a good sign; but the state of the earlier 100 smart cities makes us sceptical about where these five will go.
On infrastructure, as predicted, the Rs 100 trillion number (1,4 trillion USD) has once again been hurled at us. A positive note here is the first detailing of this number, which include accelerated development of highways, electrification of 27,000 km of tracks and suburban projects in railways, and waterways. New announcements need new jargon. This year’s is: new economy, comprising artificial intelligence, Internet-of-Things, 3D printing, drones, DNA data storage, quantum computing and data parks. Behind the new jargon, however, the policy minds craft out the old.
The one idea the Budget has pushed forward that will do well is to sell a part of government holding in Life Insurance Corporation by way of an initial public offer. This will have four implications. First, it will fetch money for the government. Second, it will deepen the stock market on listing. Third, it will enter the Sensex and change its composition and weighs. And fourth, it will force this never-reform organisation to change.
Finally, in terms of changes in direct taxes for individuals, Sitharaman has done what we had recommended: reduce the rates and remove the exemptions and deductions, as she did for corporations in September 2019. Further, by increasing the number of tax slabs to five from four in her previous Budget and to eight from five in Budget 2020, what she is telling us is that she seeks complexity of tax laws and its accompanying compliances — not simplicity. In a way, the minister is replicating the complexity of rates in GST and transplanting it on individuals.
Break down the varying rates of tax applicable to different incomes, and what Sitharaman had given us is a complex web of 10 ‘effective slabs’:
Along with the government in general, therefore, Sitharaman remains trapped in the policymaking thought-traps of the 20th century — command, control, coerce. Instead, she needs to carry India to the 21st century policymaking — simple, effective, easy to pay and file. There is much fine print here and a future essay will explore this in deeper detail.
The other small policy change she has bought in Budget 2020 is to increase the protection to deposits by Indian account holders to Rs 5 lakh (7,000 USD), from Rs 1 lakh (1,403 USD). This has taken too long to come and is still inadequate. The insurance guarantee from Deposit Insurance and Credit Guarantee Corporation began with Rs 5,000 from 1 January 1962. This was raised to Rs 10,000 (140 USD) on 1 April 1970, to Rs 20,000 on 1 January 1976, to Rs 30,000 on 1 July 1980, and finally to Rs 100,000 on 1 May 1993. Taking an average 12% growth, the number today should be around Rs 20 lakh (28,000 USD). The numbers notwithstanding, along with this protection, she now has the opportunity to table the Financial Resolution and Deposit Insurance Bill.
At the macro level, the Indian Budget boldly states, will deliver a nominal GDP growth of 10%, a fiscal deficit of 3.8% for 2019-20 and 3.5% for 2020-21. On the former, we are not holding our breath; on the latter we remain unimpressed. Almost a thousand points down, the Sensex elegantly captures the short-term impact of shifting the burden of dividend distribution tax to recipients from companies. While this is best ignored, such a luxury exists only when the economy is growing, not when it is faltering.
Perhaps, what we really need to get the Indian government going on economic issues is a real crisis of 1991 vintage. Out of tune with the harsh reality of a slowdown that may turn into a recession ahead, out of sync with wealth creators and their problems, out of sight as far as economic growth is concerned, and out of beat with the real aspirations of India, Sitharaman’s 45-page document remains steeped in the past. Hopefully, other policies during the course of the year will help perk up India’s growth.
This article was first published in the Observer Research Foundation at this link