On February 1, 2020 the Narendra Modi led government laid before parliament its first Union Budget since getting re-elected. Here Soumya Bhowmick and Roshan Saha (Observer Research Foundation, Kolkata, India) examine its chances of boosting India’s economy.
The Union Budget 2020-21 was set out to be one of the most crucial events in the labyrinths of India’s economic history. With the growth rate at an 11 year low of less than 5%, a fragile labor market, an unemployment rate at a 45 year high of more than 6% and most importantly a perennially faltering consumer confidence – Finance Minister (FM) Nirmala Sitharaman was expected to steer the ship through these turbulent waters. The key to reviving the economy was stimulating consumption demand by slashing income tax rates, extending tax slabs, ushering in structural transformations in the labor market, swifter GST collection mechanisms and higher fiscal spending even at the cost of missing deficit targets in the short-run. Most of these expectations have been met, but not without some serious lacunae in India’s contemporary macroeconomic thinking.
Goods and Services Tax (GST) has integrated India economically with highest recorded collection in January 2020 and has shown the pathway for a new fiscal paradigm. Although marred with faulty implementation at the beginning, as GST collections fall on track it is set to enhance the ‘ease of doing business’ in India. The FM started off the budget session by highlighting the GST success, inflation control, strong macroeconomic fundamentals and pro-poor schemes in the last six years – a highly optimistic tone which was not much in tandem with the current crisis in the Indian economy. As expected, the FM sent out direct signals right at the outset of the budget speech that boosting income and increasing purchasing power of the citizens are essential to India’s growth story. With this aim, the Budget was woven around three main pillars:
Aspirational India – Improving farmers’ welfare, by means of schemes such as Kisan Credit, Kisan Rail, technological and financial support to farming practices, increasing fish and milk production, etc., was central to this theme. However, there was an absence of policies that would increase the farmers’ productivity and help them move up in the complex agricultural value chains. Nonetheless, advocating balanced use of chemical fertilizers through adequate changes in the incentive regimes, if implemented successfully, is going to have significant impacts not only on farming but also on the rural ecology. Through the promotion of sustainable agriculture practices, the budget has implications for poverty alleviation (SDG 1), food security (SDG 2), clean water and energy (SDG 6 and 7), and climate change (SDG 13). Next in line were water, wellness and sanitation which showed the importance being assigned to human capital enhancement. Focusing mainly on healthcare it misses out on supply side aspects of efficient water management. Finally, the sub-theme of education and skilling cited that the New Education Policy, which would be launched soon, is aimed at increasing the much-needed education budget in India and also aligning curricula with job market requirements. Albeit, this policy has been pending for a long time and there was no definite timeline given for its execution.
Economic Development – In terms of developing the economy, the main focus was to attract businesses and remove roadblocks to youth employment opportunities in parity with India’s demographic dividend. The policies range from creating an Investment Clearance Cell to a shout out to manufacturing sectors (mobile phones, textiles), a grand 100 trillion rupees investment on infrastructure projects and creation of smart cities to larger focus on domestic connectivity (highways, 100 more airports, waterways and a call to private sectors for robust digital connectivity as well) to create self sustaining scale economies. Once again, the central point of quickly addressing the demand side problems is missed here with major policies only for the supply side.
Caring Society – Primary focus laid out on women and children, the ‘Beti Bachao Beti Padhao’ scheme was cited as a grand success through which Gross Enrollment Ratio of girls, across education levels, has surpassed that of boys – but it does not get into the schemes to improve the quality of education or tackle dropout rates. The proposal for an Indian Institute for Heritage and Conservation to be built for research on India’s cultural heritage for greater international exposure and attracting tourism is a much-lauded initiative in this sector. Environment and climate change is taken into consideration too – in alignment with the SDGs and the Paris Climate Change Agreement. However, it seemed that the climate change and environment agenda were to work in silos without being synchronized with the other major development agendas proposed in the budget.
The FM claims to centre this budget around ‘ease of living’ in synchronization with the ‘ease of doing business’ for inclusive access to opportunities with a renewed sense of respect for the ‘wealth creators’ of this country. There is no doubt that on paper, this budget portrays a very comprehensive framework that looks at addressing the interconnectedness between financial equity, economic progress and a progressive society through its three main themes of – Aspirational India, Economic Development and Caring Society. However, removing the veneer of attractive themes and poetic verses, the budget appears to be hollow than being practical and rejuvenating.
There is a catch-22 situation which is pulling the markets into a crisis and the current budget was clearly lacking any quick boost that was desperately needed to bring the country out of its immediate frenzy. The government needs to acknowledge a slackening in consumption demand in order to successfully manoeuvre the economy back to its stellar growth rates. Despite the much-expected income tax cuts in the new regime, one has to note that the majority of the total tax collected comes from the more affluent taxpayers whose propensity to consume is low as compared to the citizens belonging to the lower financial strata and are out of the taxation ambit. Hence, identifying India’s consumption led problem may need mending at other places too, and in a larger way.
The enhanced government spending announced on various sectors alongside tax cuts is slated to make a serious dent on the fiscal revenue in the upcoming years – where lies a high chance of missing the fiscal deficit target of 3.8% of GDP. The expectations of increased government spending on social schemes may be problematic too, as more spending would mean lesser money for capital expenditure.
The budget is indeed a trade-off between immediate and future needs of the Indian economy. Are we ready to wait for the time in between? Is the political structure and government revenue collections equipped to carry forward this long-term vision? Depending upon whether answers to these questions are in the affirmative or in the negative the budget will evoke different opinions. In conclusion, it can be said that the Budget 2020-21 does look good theoretically and contains tenets of a holistic long term vision but neither does it acknowledge the more pressing issues at hand, nor does it rid itself from the age old productivity-linked growth bubble.
Source: Lok Sabha TV (Parliamentary channel of India dedicated to the Lower house of the Indian Parliament).
This article gives the views of the author, and not the position of the South Asia @ LSE blog, nor of the London School of Economics. Picture: Indian Rupees Note. Itkannan4u, Pixabay.