Opinion

No clear strategy for an economic recovery

Narendar Pani | Updated on February 02, 2020 Published on February 01, 2020

There’s hardly any effort to provide an immediate boost to demand. The Budget hinges on merely waiting for better times

A striking aspect of Nirmala Sitharaman’s 2020-21 Budget is its lack of conviction. This is immediately evident in her proposals for personal income tax.

She first lays out a completely new regime, doing away with virtually all deductions and doubling the number of slabs. And then she doubts its value and makes it optional. She leaves it to the taxpayer to decide whether she wants to follow the existing regime or the new deduction-free one.

Such ambivalence is not without its costs. Most deductions are designed to incentivise macroeconomic behaviour. For the middle class one of the more popular deductions was the reduction in taxable income for persons taking housing loans. This deduction was expected to, and did, encourage investment in houses by young income taxpayers. A person considering such an investment now has the option of getting a lower tax rate without investing in a house. This is not a condition the housing market would like at a time when the demand for housing is low.

Emerging divergence

This lack of conviction extends to the macroeconomic strategy underlying the Budget, or more accurately the near absence of such a strategy. There is an emerging divergence in the views of the IMF and the Indian officialdom on the Indian economic crisis and the global slowdown. The IMF has taken the view that, with India now being the fifth largest economy in the world, its slowdown is pulling the world economy down.

In contrast, the Economic Survey argues that one of the major causes for India’s economic slowdown is the slower growth rate of the world economy. Implicit in the official Indian view is that things are beyond the control of the Indian government. While a few steps can be taken, we would have to wait for the world economy to recover and the cycle to bottom out.

This strategy of merely waiting for better times would appear to be the platform on which the Budget is built. There are few signs of a major strategic initiative designed to boost the economy. The speech does have a section on infrastructure but it deals primarily with longer term goals, like a $5 trillion economy, rather than an immediate initiative to counter the slowdown. Indeed, the specific figures for 2020-21 in the Budget amount to less than 2 per cent of the amount the Finance Minister had earlier said would be spent over the next five years on the National Infrastructure Pipeline.

There are also few signs of an effort to provide an immediate boost to demand. The schemes that would normally be used to make this effort have not seen any dramatic increase. The allocation for the Mahatma Gandhi National Rural Employment Guarantee schemes has been kept at levels they reached in 2018-19. The Prime Minister’s favourite scheme — Pradhan Mantri Kisan Samman Nidhi — has also been kept at exactly the same levels as in the last Budget.

Without a clear strategy for an economic recovery the Budget exercise has focussed on making up for the revenue shortfalls caused by the economic slowdown. This has been done through a combination of pragmatism and optimism. The pragmatism is in allowing the fiscal deficit to rise from 3.3 per cent in the current year’s Budget to 3.5 per cent for 2020-21. The optimism is in the expectation that it can be brought down to 3.5 per cent from the 3.8 per cent it reached in the Revised Estimates of 2019-20.

For the optimistic estimates to come through, two of the assumptions the Budget makes would have to be valid. First, the Budget has estimated a nominal growth in GDP of 10 per cent. In a normal year this would appear to be quite reasonable. But it assumes that the slowdown is over and the economy will recover in the coming year. The second assumption the Budget makes is that the government’s disinvestment strategy will break dramatically away from recent patterns. It expects earnings from disinvestment to be well over three times greater than what was achieved in the Revised Estimates for the current year.

The Finance Minister will be hoping that the economy recovers soon enough to make her assumed growth rate realistic, and to generate the demand for the assets the Budget hopes to disinvest. But in the absence of a clear strategy for an economic recovery she cannot be too convinced about that either.

The writer is a professor at the School of Social Science, National Institute of Advanced Studies, Bengaluru

Published on February 01, 2020
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