An ordinary Budget in extraordinary times
Given the dismal outlook of the Indian economy, Budget 2020 was perhaps the Union government's shot at redemption. With real GDP growth down to a six-year low of 5 per cent and nominal GDP growth down to a 42-year low of 7.5 per cent, the Indian economy's growth engines have been slowing down. The government did make efforts to resuscitate the economy, albeit they did not make any real impact as the Economic Survey 19-20 highlighted. Starved corporate investments, contracted government demand, low private consumption and poor net exports — drivers of economy (GDP) — quantitatively explain the slowdown. India's economy is majorly driven by private consumption and corporate investments. While the government attempted to boost investments by axing the corporate income tax last year, it could not yield the desired consequence, at least not in the short-term that the government expected it to. On the other hand, the government attempted to boost private consumption in an apparent bid to provide the much-needed impetus to GDP growth. Through Budget, it has indeed focussed on providing consumers with options that enhance their disposable income. Enter, an alternate tax regime consisting of new I–T slabs with chopped rates but no exemptions. The optional new regime is likely to target young individuals sitting on the lower end of income brackets who are more likely to consume rather than their higher counterparts who are habitual of saving their income. But both rise in disposable incomes and subsequent spending is beyond precise estimation and hence lies the risk of recovery on government's part. While the government could've single-handedly provided the economy with the momentum by increasing expenditure, poor tax and non-tax revenues dampened the prospect — a shortfall of Rs 3 lakh crore in gross tax revenues. This effectively forced the government to cut expenditure and breach the fiscal deficit target for third-year in a row. Now, there is a heavy reliance on non-tax revenue for the next fiscal which explains the government's disinvestment ambition that has seen a more than threefold increase — Rs 2.1 lakh crore in FY21 from Rs 66,000 crore raised in FY20. Though the Survey proposed higher disinvestment targets, risks remain nevertheless and with Air India entering its second sale process, those risks are more than evident. Given how investment and private consumption are down, and net exports remain negative, government expenditure is the lone option for driving GDP growth. Naturally, the total expenditure would rise — pegged to increase by 12.7 per cent in 2020-21. Accounting for the rise, Nirmala Sitharaman rightly asserted a deviation of 0.5 percentage points from the fiscal deficit target to 3.8 per cent of GDP for FY20 from the previous estimate of 3.3 per cent. Though she stated that the said deviation was in line with Section 4(2) of the FRBM Act which provides for such deviation on account of structural reforms in the economy with unanticipated implications. So, a 3.8 per cent fiscal deficit for current fiscal (19-20) and 3.5 per cent for the next fiscal (20-21). Given the revised fiscal deficit target, the budget 2020 does give out lapses on the government's part vis-à-vis fiscal health. While relaxing the deficit target should have been to allow increased government spending in view of revitalising the economy, the same was done to compensate for the low revenues. The Survey ambitiously proposed that the government, in exercising its strong mandate, must expeditiously deliver on reforms that may allow the economy to rebound in FY21. Yet, the government could not manage to curtail deficits or provide stimulus to increase consumption or investment. But an optimistic Prime Minister praised the Budget for having both vision and action and said that it will strengthen the foundations of the Indian economy in this decade.
The longest Budget speech — 2 hours and 40 minutes — brought along a slew of positive decisions that appeared to make up for the absence of an effective stimulus. Lower personal I–T rates, raised deposit insurance cover from Rs 1 lakh to Rs 5 lakh, novel taxpayer's charter, LIC IPO, repeated promise to double farmers' income, 5 new smart cities, scrapping of dividend distribution tax (DDT) levied on companies, 100 new airports by 2025 under UDAN scheme, Kisan Rail programme for a seamless national cold-supply chain for perishables, 5 new archaeological sites with on-site museums, increased space funding by 8 per cent, et al, were all unravelled as salient pros of the new Budget. But the excitement from these pros was brought down by cons that, though not part of FM's poetic emphasis, neutralised the Budget. While development for all and caring society were the promulgated words regarding the Budget, there was no rise in Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) allocation. While Rs 71,002 crore was spent in 2019-20 (RE), the Budget allocated only Rs 61,500 crore in 2020-21. Even PM KISAN got the same outlay as previous budget — Rs 75,000 crore. This stretches to more or less all social sector heads which have retained the same budgetary allocation. It is to be noted that spending on most of these social heads was not up to the allocation in the last budget and the same can be attributed to the government's revenue shortfall in the current fiscal. Budget estimates for major heads remained somewhat expected. While the government went big on words — Aspirational India, Caring Society — and displayed a new scheme of taxation, it was difficult to ascertain whether it addressed the record-high unemployment or consistently deteriorating GDP growth (GDP: 7.1% in 16-17, 6.7% in 17-18, 5% in 19-20) in terms of short-term measures. Sitharaman's speech and the deliverables that she presented can be said to greatly enhance the economy in the long run. But that long run will only be ensured if the economy treads a high-growth trajectory like it was doing prior to twin failures of GST and demonetisation.
A visible gap between the Economic Survey's recommendations and the Union Budget's decisions can be realised. The government takes pride in the new Income Tax regime and other sops it proposed under its overall theme of "Ease of Living". Its Sixteen Action Points for Agriculture, Irrigation and Rural Development will be closely observed as would be the National Infrastructural Pipeline since both of these have the capacity to transform the face of the country in its current state. The focus on rural sector can be said to be a cornerstone of this Budget but whether this focus yields will again depend on quality implementation. Budget 2020 resembles a usual financial policy document with some changes made to highlight its apparent dynamism. It did not take into account the economic urgency with which India entered the 2020s. It has the vision to spur long-term growth but again, that will be feasible once the economy is back on track. Same old allocations for heads came with new but not unexpected reforms in what can be perceived as a general budget dose in respect of changing times. The government wants to gamble on higher fiscal deficit by focussing on revenue generation — both through tax and non-tax revenue streams. But the same depends a lot on whether consumption is revived through it or not. A lot of what the Budget brings to the table in terms of reforms will depend on government's execution of the same. In summary, there was nothing extraordinary about the Budget at a time when extraordinary was the most-needed.