The budget does not address the crisis of demand
The FM made an attempt in good faith to present her vision. But the budget lacked a diagnosis of what is wrong, a prescription to address it, and made baffling choices
This was the longest budget speech in India’s history of budget speeches. But two hours and 40 minutes later, the only thing we have clarity on is that the government is still not willing to offer a clear diagnosis, forget the much-needed prescription for an economy, which in the words of a former chief economic adviser, is headed for the intensive care unit.
To be sure, finance minister Nirmala Sitharaman made a good faith attempt to present her vision for what the economy needs. Aspirations, economic development and care are the three pillars that will drive the Indian economy. And to achieve this vision, she presented a large number of policy actions. A detailed 16- point action agenda for agriculture, a focus on education and skills, water and sanitation, an investment-clearing cell, district-level export hubs, infrastructure focused skill development, the National Infrastructure Pipeline — the list goes on. But nowhere in this laundry list of policy items can one identify any policy steps that respond to the urgency of the slowdown.
Forget any bold ideas or fiscal stimulus. Even the choices made within the current basket of policy actions and deficit targets are baffling. Consider this. There is little argument that the decline in consumption demand, combined with high inflation, especially in rural India is a matter of serious concern. In this context, many, including this columnist, had argued for the need to urgently strengthen public expenditure in rural India through the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). But instead Budget 2020-21 has seen a significant 13% cut in allocations from revised estimates of the previous year. This is despite the fact that the MGNREGS budget allocation has, for years, fallen short of demand for work, resulting in spending excesses of over ~4,000 crore (2018-19 figures). Instead, the focus seems to be on spending in rural India through the PM-Kisan, which has received an allocation of ~75,000 crore, a 38% increase over revised estimates. But , as my colleague Avani Kapur has highlighted in this newspaper, the implementation of PM-Kisan has been riddled with problems of targeting and weak implementation. In fact, this is one reason why expenditure for the scheme in FY-2019-20 has been significantly reduced from a budgeted estimate of ~75,000 crore to a revised estimate ~54,370.15 crore. Given these difficulties with the PM-Kisan and the fact that demand for MGNREGS is high, the choice of prioritising allocations for PM-Kisan over MGNREGS, at a time when rural consumption is at an all time low, can only lead us to one conclusion. The government has got both the diagnosis and the prescription of the current slowdown, completely wrong.
Add to this is an important cut in the food subsidy from a budget estimate of ~1,84,220 crore to a revised estimate of ~1,08,688.35 in FY 2019-20 and a lower allocation for FY 2020-21. Declining consumption clearly indicated that rural India was hurting from the current slowdown, and this budget has likely only made the problem worse.
Rather than slash allocations, this was the opportunity to initiate an overhaul of the public finance management system — rationalising subsidies, restructuring centrally-sponsored schemes, and most important, streamlining fiscal flows to reduce unspent balances (to the tune of over 1 lakh crore rupees) in different central schemes — and re-prioritising public expenditure, particularly in welfare schemes. But, instead, the budget merely reiterated the government’s oft-stated commitment to overhauling central schemes, leaving the problem for a future date.
An important issue that the FM did acknowledge head-on was the need to ensure transparency and credibility of the governments’ fiscal math. Importantly, she added an annexure that enumerated the government’s off-budget borrowing. This is a very welcome move and a critical first step to addressing the credibility crisis that the government’s fiscal numbers have faced since the obfuscation in the July budget. But the fine print raises more questions than it answers. The FM conceded to a fiscal slippage of 0.5% over last July’s promise of a fiscal deficit of 3.3%, taking the fiscal deficit for FY 2019-20 to 3.8%. The promise for FY 2020-21 is to put India back on the path of fiscal consolidation with a commitment to containing the fiscal deficit to 3.5% of GDP. But when offbudget borrowing is accounted for, the actual fiscal deficit is far higher and the projected target of 3.5% remains unachievable. Commitments to meeting this target from disinvestment and improvements in the Goods and Service Tax collection may not be enough, given collections in previous years. It may have been better to stick to a more realistic and credible projection. Despite the promise of transparency, the fiscal math disappoints again.
In the days before the budget two news items dominated the headlines — 5% GDP and the image of a young man with a gun pointed at protestors. These headlines were giving credence to the view that the prioritisation of this government’s political, majoritarian agenda was undermining India’s economy. This budget was an opportunity for the government to change the narrative. It hasn’t.