Demand stimulus missing in Budget
The lack of interest in pushing up the outlay on rural employment schemes is rather puzzling.
The second budget charted out by Nirmala Sitharaman provides little in terms of a coherent direction. At a time when the economy is in the doldrums, a budget with a bold strategy to boost growth was the need of the hour. Instead, one found a well meaning statement of intent to launch many schemes but few concrete measures to push up demand and provide a stimulus to a lagging economy.
On the plus side, the measures related to taxation have been progressive and heartening. The simplification of the personal tax slabs appeared confusing at first, but are now increasingly recognised as the first step towards achieving a less complex direct tax system. Yet there has been hesitancy in taking the simplification and tax cuts up to the highest tax slabs. In fact, there was greater boldness in the earlier decision to cut corporate taxes. Similarly, the tax incentives for sovereign wealth funds are welcome, especially as these are being linked to potential investments in infrastructure projects. The concessions to taxation on employee stock options, the taxpayers’ charter and the launch of a direct tax dispute settlement are all steps in the right direction and give the impression that the Finance Minister has paid heed to all the complaints about over-zealousness and even terrorism by tax officials.
As far as revenue is concerned, on the other hand, the estimates of gross tax revenue seem overly optimistic given the fact that these have failed to reach targets for the past two years. This would imply greater reliance on non-tax revenues like public sector disinvestment. Even in this area, last year’s target of Rs 1 lakh crore has not been achieved, so expecting Rs 2.1 lakh crore in 2020-21 seems unrealistic. One may have been inclined to believe that disinvestment in LIC and IDBI will push receipts up, but for Ministry of Finance officials actually conceding in post-budget interviews that some proceeds will flow into the coffers only in the next fiscal. The presumption that the disinvestment process will be slow indicates a casual, business-as-usual approach, rather than the urgency of an economy that is facing an unprecedented slowdown.
As for infrastructure, there is little new barring mention of the National Infrastructure Pipeline that has already been launched though an allocation of Rs 1.7 lakh crore has been made for transport projects. While the scheme is laudable, it will have a medium term impact and cannot provide the immediate stimulus that is being looked for to boost growth.
One must shift focus to examine budgetary measures related to the rural economy where the Finance Minister has lost an ideal opportunity to revive consumption and the virtuous cycle of growth. The outlay for the Mahatma Gandhi National Rural Employment Guarantee Scheme has been frozen at Rs 61,500 crore, the same as in the budget estimates last year, though the actual expenditure was higher at Rs 71,000 crore. The explanation given for this is that this is a “need-based scheme” and allocations depend on demand. On the contrary, unless funds are specifically kept aside for programmes, it is difficult to raise them later. Hence, the concept of fixing budgetary targets for schemes and fixing outlays. In the case of rural employment programmes, these can provide ready money in the hands of the poorest of the poor in rural areas. This would have provided much greater dividends on the demand side rather than tax cuts to the relatively small percentage of personal income taxpayers.
It must be recognised that it is the rural economy even now which drives overall demand in the economy. It is because of this reliance on the consumption stimulus from rural areas that the fate of the monsoon is awaited so eagerly every year. The lack of interest in pushing up the outlay on rural employment schemes is hence rather puzzling. This is in contrast to the apparent interest in raising farmers’ incomes by the spate of broad-based schemes in the agriculture sector including changing outmoded laws and giving a sizeable increase in credit to this segment.
As for trade issues, the budget has little to enthuse barring the decision to make districts as export hubs. This could be an innovative scheme but needs to be given formal structure. Less appealing is the decision to push the country into protectionist mode by hiking import duties on a whole host of products including medical equipment, furniture and toys. This is touted as a way of protecting domestic industry from cheap imports, largely from China. But raising tariffs has rarely led to revival of domestic industries. In fact, the government needs to take a leaf out of its own Make in India playbook, which has succeeded in a spectacular way over the last five years in the manufacture of mobile phones. India has now become the second largest mobile phones manufacturer after China. From only two phone producing units in 2014 to 268 units in 2019, this is indeed a shining story. And it has been achieved without the crutch of higher import duties.
Nirmala Sitharaman’s second budget is thus disappointing on many counts. There are definitely some bright spots, but a clear-cut path to stimulate demand and revive the growth story for 2020-21 is sadly missing.