This is not an easy time to be part of the top team at the country’s Finance Ministry. With GDP growth in free fall, unemployment at a four-decade high, falling consumption and demand, weak investment climate and the general sense of gloom and doom in the global economy, Nirmala Sitharaman and her team had a tough task on their hands.
The general consensus on the Budget presented in Parliament on February 1 was that it was long on detail but short on an overarching narrative. Those desperately looking for a stimulus package to boost demand and investment sentiment in the economy were disappointed.
The more charitable view was that the Finance Minister had managed to walk the tightrope — especially on the fiscal deficit front, where the current fiscal’s figure were revised upwards to 3.8 per cent. This was always on cards and if the pre-Budget news reports are to believed, the markets had already factored in a slippage in the fiscal deficit. According to the ‘charitable’ school, the Finance Minister made use of the ‘wiggle room’ allowed in the FRBM Act to tweak the fiscal deficit figure without going on a spending spree.
Critics not impressed
The critics were, however, not impressed and came down hard on the Budget. According to this lot, these are extraordinary circumstances that needed extraordinary measures. They were all for a ‘spending splurge’, especially on the capital side (read infrastructure) to kick-start the consumption and investment cycle. They were perhaps looking for a 2009-style stimulus package that the then Finance Minister, Pranab Mukherjee, came up with in the post-Lehman financial meltdown scenario.
The Modi government was perhaps mindful of the after-effects of this stimulus package that played out after 2012 — spike in inflation, crowding out of investments, rising current account deficit and declining growth. The corruption scandals that hit during the UPA-2 regime led to an overall sense of ‘policy paralysis’ and did not help matters.
But as former RBI Governor C Rangarajan has said, the then UPA government could not be faulted for putting in place a stimulus package in 2009, but it could have certainly been pulled up for not winding it up earlier and returning to the path of fiscal rectitude.
The income-tax googly
So what were the big takeaways of Budget 2020? The tweaking of personal income-tax slabs was perhaps the highlight. There was already a clamour for cutting income-tax rates, which got louder after the Finance Minister cut tax rates for corporates in September.
But this move had enough critics even before the Budget was presented. Given the minuscule number of people paying income-tax in the country, a cut in rates was not going to lead to a spending spree and boost in demand, was their contention. Another argument was that since urban demand, or demand among the tax-paying people, was already saturated, a tax cut would lead only to higher savings.
But the Budget tweak on personal income-tax rates has created more slabs and made tax administration more complicated, when the objective should have been to simplify things.
The need of the hour was putting more money into the hands of people in the rural economy.
DDT, disinvestment target
The second big takeaway was the move on the Dividend Distribution Tax, which will now be taxed in the hands of the dividend receivers and not the company paying it, a long-standing demand of the corporate sector. This is seen as a ‘market-friendly’ measure designed to bring more portfolio investors into the Indian markets.
The third takeaway was the massive jump in the disinvestment target, with the intent to divest stake in insurance behemoth Life Insurance Corporation — a move that has predictably raised the hackles of the unions.
Given the pressures on the tax revenue front, the government has trebled the disinvestment target for 2020-21 to ₹2,10,000 crore from the revised estimate of Budget 2019-20 of ₹65,000 crore. Given that the 2019-20 Budget estimate figure of ₹1,05,000 crore had to be sharply cut down to ₹65,000 crore in the revised estimate, the government is being hugely optimistic in setting a target of ₹2,10,000 crore.
Also the tax revenue projections for 2020-21 at ₹24,23,020 crore is nearly 12 per cent higher than the revised estimate for 2019-20 of ₹21,63,423 crore, which many see as too optimistic, given the tepid collections in GST and the corporate tax giveaways.
Rural economy
Putting money in the hands of people in rural areas had emerged as a big narrative before the Budget was presented. Economists from across the political spectrum had vigorously favoured a greater allocation for rural schemes to kick-start consumption in the rural economy.
It was in this aspect that the Budget was most disappointing. Far from increasing the allocation for rural job scheme MNREGA, the government actually slashed it by ₹9,500 crore.
There were some welcome initiatives on transport infrastructure and education, but this Budget lacks the ‘big-bang’ steps that are so desperately needed to revive consumption and jobs in these trying times.
When Narendra Modi came to power at the Centre in 2014, he had the reputation of being the most industry-friendly leader in the country. Interestingly in the sixth year of his regime, his government has proved to be every bit as ‘statist’ and ‘welfarist’ as the governments that came before him.