Booster for the economy?
The combined impact of the concessions will be substantial
In his maiden budget, Piyush Goyal turned into Father Christmas on February 1.
The minister has given away gifts to farmers, workers, the middle class, pensioners, and urban poor. If money talks, then it should weigh on voters in their choice, but then budget and gains do not really determine election results. All along, incumbent governments have tried this soft option to little avail. But divorced from that ulterior motive under the budgetary exercise, what does the finance minister's budget speech amount to in its totality?
FM's speech is an overall assessment of the economic policies of the last four years, which conveys a picture of a stable and growing economy. The FM, presumably under the guidance of Prime Minister, tried to emulate the example of China.
At the end of the Chinese Communist Party congress last year, Xi Jinping laid out an economic vision for the country which aimed at making China the technology leader by 2025. It listed ten industries, including Artificial Intelligence (AI) where China would surpass the United States.
So does the Modi government's economic blueprint, spelt out in dim outlines, at the concluding part of the budget speech, lays bare its ambitions for India, provided, it comes back to power.
From 13th largest economy in 2013-14 to 6th largest now, FM projects $5 trillion economy for India in five years. Thereafter, it keeps growing to touch $10 by 2030. By then, India obviously would become the third largest economy in the world.
No wonder, Congress critics have acrimoniously doubted this, describing the budgetary efforts as "building grandiose castles in the air".
But then, there is no reason why India should not dream big. We already are a big economy and India has the wherewithal to attempt to convert airy castles into realistic structures.
The economy is in robust health, growing at a healthy clip of over 7 per cent. Low inflation gives greater free play. Total FDI flow in four years has been $239 billion.
In the circumstances, the Budget's emphasis is on economic consolidation rather than announcing fresh paper reforms. Tax collections have remained comfortable, even after the introduction of a most ambitious and disruptive tax reform measure. The number of taxpayers shot up in four years, giving a larger tax base.
FM could thus adopt an optimistic stance and confidently offer gifts to major segments of society. Concessions given seeks to more than offset the impact of demonetisation and GST.
Critical giveaways, among them: Farmer income support scheme; similar concessions for urban poor; pension scheme for workers; significant income tax concession for the middle class and Interest rate subvention across sectors on loans to farmers, small businesses.
The combined impact of these concessions would be substantial. However, with growth fiscal deficit should be within targets, claims Mr Goyal. January 2019 revenue collection was above Rs1 lakh crore, he cited.
The FM's claim about maintaining fiscal target despite giving large concessions would critically depend on the growth assumptions underlying the budgetary exercise. Once the GST structure stabilises and the economy regains its full verve, revenue buoyancy could be expected. The basic issue would thus be to maintain and, more hopefully, push up the growth momentum.
In this context, the FM indirectly refuted allegations of failure to create jobs, stating that overall growth across sectors, particularly including transport sector, should have created a large number of fresh employment. There are, of course, perfectly valid reasons to throw the unemployment report, leaked out a day before, totally out of court.
The legitimate question is: do the economics of give-aways amount to much. Should that help India grow? In a way, this is the same kind of experiment which was tried by US President Richard Nixon. Large tax cuts were given to the people in the hope that will drive consumer spending up. More money in people's pockets should encourage them to spend.
Piyush Goyal has not given that large tax concessions but the little that he has given is reassuring to consumer confidence. It may be mentioned, such moves could be particularly relevant for India which is a domestic consumption-driven economy in contrast to, say, that of China or South-East Asian countries. Secondly, these are uncertain times globally and a large domestic market gives the essential condition for a continuing growth story.
The finance minister has also predicated his growth momentum hypothesis on infrastructure creation and through larger outlays, once again, taking a cue from the Chinese experience. Large infrastructure projects have ripple effects and create conditions for faster growth.
Lastly, another interesting side note to the budgetary exercise is the effort directed at the tax administration reform rather than in tax structural changes. This should create smooth procedures on the back of the digital platforms he had indicated being set up for handling tax filing and processing. When lower rungs of tax administration are taken away from direct handling, tax-payers hopes rise. Being a chartered accountant himself, he possibly understands these issues better. For the economy as such, the budget can prove to be a booster — for the morale as well as for giving a nudge.
(The views expressed are strictly personal)