Workmanlike Budget

The second Budget of Finance Minister Nirmala Sitharaman is, quite surprisingly, a business-as-usual exercise, which conveys more the confidence of a government that has been voted back handsomely than one which is battling a serious economic slowdown. Yet, it makes an effort to step up consumption and investment by using the escape clause under the Fiscal Responsibility and Budget Management Act to increase the fiscal deficit for the current fiscal by 0.5 per cent of the GDP to 3.8 per cent, against the budgeted 3.3 per cent, and keep that elevated level for the next fiscal at 3.5 per cent. It is another matter that unofficial estimates of the current fiscal deficit are in the region of 5 per cent. The Budget deploys a combination of expenditure increases and tax cuts to get the economy moving, but the measures come across as a trifle underwhelming in relation to the challenge of revival. As for an expenditure stimulus, the Budget has projected a 20 per cent increase in capital expenditure and a 15 per cent rise in revenue spending for the next fiscal. A ₹40,000 crore capex spike in telecom to over ₹60,000 crore, over last year’s Budget estimates, is a notable area of emphasis, even as total expenditure has been ramped up from about ₹27 lakh crore to about ₹30 lakh crore. However, the fact is that projected Central government spending for 2020-21 as a percentage of the GDP remains flat at about 13.5 per cent, unchanged from last year’s Budget estimates. The expenditure stimulus cannot, therefore, be regarded as ambitious. Outlays for the flagship agriculture and rural development schemes have not changed from last year’s level. The agriculture budget for 2020-21, at ₹1.5 lakh crore is the same as the BE for this year. What is also a worrying trend across sectors is the inability of the ministries concerned to spend the amounts allocated to them. As for the revenue foregone through proposed income tax cuts to stimulate private consumption, the estimate of ₹40,000 crore seems like the upper limit. As with the corporate tax cuts which were based on the shift away from exemptions, it is not certain whether individuals will reject exemptions and opt for the reduced rate. On the Budget numbers, the nominal growth projection of 10 per cent as well as tax collection estimates, albeit optimistic, are more realistic than last year’s. However, the reliance on disinvestment and non-tax revenues (₹2.1 lakh crore apiece) seems excessive, given the ₹40,000 crore shortfall with respect to divestment targets this year (₹65,000 crore as against ₹1,05,000 crore) and the chance of AGR payouts not happening.

However, the Budget cannot be accused of not conveying a sense of direction. The move away from exemptions and a promise to clear the clutter in direct taxes are to be welcomed, even if that transition takes a few years. A sense of reassurance also stems from consistent support to certain sectors such as solar power and electricity generation in general. With the GST in place and the promise of a charter on direct taxes, both investors and consumers can hope for policy certainty as well, hopefully, fewer procedural hassles. Taxpayers can expect some relief on the settlement of tax litigation. The move to restore faith in economic data is also a step forward.

When seen along with the Economic Survey 2019-20, it is clear that the Centre wants to focus on creating the right conditions for private investment and consumption, rather than actually pick up the tab. This might be fine for an economy that is growing at 7-8 per cent but not one where both structural and cyclical forces are pulling it down. An adverse political economy environment can hold back consumption and investment, deterring foreign investors, even if the government relaxes the rules for the latter. Fears of tax terrorism may not abate so easily, despite an emphatic assurance by the Finance Minister. They will have to be followed up by de-criminalising corporate offences and not throwing behind bars those who are accused of misappropriating input tax credit. The Budget’s notable steps to boost private sector activity relate to the transfer of the burden of dividend distribution taxes to the shareholders and the tax concession to ESOPs to spur start-ups. It has sought to reach out to the middle class savers by raising the insurance cover for bank deposits from ₹1 lakh to ₹5 lakh.

However, in the final analysis, this is a run-of-the-mill Budget and not a path-breaking one. With health and education outlays remaining stagnant, Ayushman Bharat notwithstanding, there appears to be no realisation of the importance of developing human capital in keeping India as a dominant player in the world economy. The role of the State in developing mature markets and creating an equipped labour force has not been fully grasped. It has to go beyond being a facilitator for business.

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