20 years ago today

Financial year 2019–20 has been arduous for both the Indian and the global economy. Falling GDP growth rates in the US, coronavirus outbreak in China, Brexit in Europe and rising tensions in the Middle East are factors that will pose challenges to the Indian economy in 2020-21.

Given these challenges, the Finance Minister has taken a cautiously optimistic approach, and delivered a pragmatic Budget that could speed up India’s economic growth and pave the way for making India a $5 trillion economy by 2025. A look now at the standout features of Budget 2020.

Macroeconomic stability

The Budget re-emphasises the government’s unequivocal commitment towards macroeconomic stability and fiscal discipline. The fiscal deficit of over 4 per cent that this government inherited has been successfully maintained at a manageable level. The Central government’s debt was reduced from 52.2 per cent of GDP in 2014 to 48.7 per cent in 2019.

This has led to better inflation management with the inflation rate falling from 9.4 per cent in 2013 to 3.4 per cent in 2018. Such a diligent fiscal discipline has made India a sought-after investment destination in the world. FDI investments in India grew from $36 billion in 2013–14 to $64.3 billion in 2018–19.

Digital economy

Technological revolution in the form of artificial intelligence, 3D printing, quantum computing, 5G technology, and robotics poses serious challenges and, at the same time, provides great opportunities for the future. While Indians constitute a major chunk of the workforce of global tech firms, and have contributed to the creation of these technologies, it is unfortunate that India has not been able to produce a major technology company in the tech product category in the world. The Budget has tried to address this gap in the Indian services sector by creating a positive ecosystem for the technology industry.

Indian consumers enjoy internet data at the cheapest price in the world. Along with this the fast pace of technology adoption by its rising young population makes it one of the largest generators of data in the world. The cliché that data is the new oil has been used many times before, but the fact remains that this new oil will generate the next wave of tech giants in the world.

To achieve this, the Budget rightly channelises the collection and storage of data within India by laying a roadmap for the creation of data parks in the country. Moreover, the impetus provided for digitising all public institutions will create abundant raw data and make India a data superpower in the world.

The Budget also provides a roadmap for the conversion of this data into tech products. It proposes two important schemes to achieve this goal: The National Mission on Quantum Technologies and Application; and Seed Funding for Startups.

The data generated and stored within India will be used by companies and start-ups for the creation of new products. Additionally, realising the fast-paced nature of the tech products sector, the support needed for creating patents have been enhanced and the intellectual property rights mechanism has been digitalised. This creates a well-rounded policy structure for the future Indian digital economy.

Sequencing of reforms

The Budget has continued to provide a thrust to the manufacturing sector and created the right environment for the growth of global manufacturing giants from India. Achieving economies of scale makes firms competitive in the global markets, such as in China. However, in India, the prevalence of inverted customs duty structure in many sectors and the availability of cheap imports acted as hindrances in increasing average firm size and achieving economies of scale.

The Budget rectifies these issues. Reduction of customs duty on raw materials and an upward revision of customs duty on finished products manufactured domestically will allow firms to expand and create manufacturing giants in India.

More importantly, the Budget gets the timing and the incentive mechanism right for a revival of investments in the country. The Indian economy has been facing an investment slowdown since 2012. Realising the magnitude of the problem, the government provided a Keynesian stimulus in the form of a corporate tax cut to the tune of ₹1.45 lakh crore just a few months before the Budget.

The tax cut helped the corporate sector recover its finances and gain higher valuations. It has made them financially stronger and has increased their investment potential. With this background, the government has rationalised the customs duty structure and opened new avenues for public private partnerships (PPP) in areas such as warehousing; railways; smart cities and social infrastructure. The sequencing of reforms will make investments attractive and fire up the animal spirits of the private sector.

Financial sector reforms

The bond market in India is not as well developed as the equity market. The bond markets in developed economies play a major role in funding corporates, governments, and long-term projects. However, in India, the banking sector is burdened with this task. The Budget takes the initial steps towards broadening and deepening of the Indian bond market.

The limit set on Foreign Portfolio Investors (FPIs) investing in the Indian bond market has been increased from 9 per cent to 15 per cent. The government has also allowed for the introduction of new debt-based exchange-traded funds. These reforms will open new opportunities for foreign investors in the Indian debt market.

The Budget provides valuable investment opportunities for retail investors. LIC, one of the most respected behemoths of the Indian government, and IDBI Bank have been earmarked for disinvestments this year. The disinvestment target for the upcoming financial year has also been increased from ₹1 lakh crore to ₹2.1 lakh crore.

The valuation gain that the government will receive through this disinvestment process will be shared with retail investors in the country. Additionally, the increase in the deposit insurance limit from the current ₹1 lakh to ₹5 lakh and the proposed amendments to the Banking Regulations Act to strengthen the cooperative banks will protect the interests of all bank customers. This increased guarantee will address the risk of bank runs in the country and will also ensure stability for the overall banking sector.

The Finance Minister has taken a cautiously optimistic approach and has presented a balanced Budget that protects India’s macroeconomic stability, while also continuing the Keynesian stimulus through infrastructure building. After a few years, when Indians look back at the Budget presented in 2020, they will understand the global and domestic difficulties faced by the Finance Minister and appreciate her for the pragmatism with which she has handled the challenges of the Indian economy.

The writer is a Consultant with NITI Aayog. The views are personal