Miss the big picture

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The budgets presented by Modi government finance ministers have something unique. They are primarily an expression of long-term intentions, as opposed to policy statements that affect the short-term prospects of individuals or companies. Government documents indicate that important policy changes – such as the implementation of the GST, the new bankruptcy and bankruptcy law or corporate tax cuts – will not be the focus of events such as Household Day. In this sense, aside from the alternative income tax regime, which apparently puts more money in the hands of an upward-moving middle class (annual income under Rs 15 lakh)-Budget 2020 was something of a non-event. However, some industries have received attention. Finance Minister Nirmala Sitharaman outlined 16 measures for the agricultural sector and confirmed the government's goal of "doubling farmers' incomes by 2022". Agricultural economist Ashok Gulati, however, puts it this way: "This will require real income to grow almost 15 percent annually over the next three years. Can this be achieved at all? I'm amazed at the lack of understanding of the problems and challenges involved." (See BITE, page 44.)

When India described Budget 2020 as "do or the moment" in its pre-budget edition today, we didn't overestimate its importance. This was the first full budget of a new decade to be presented amid an economic crisis. According to forecasts, India's growth could drop to an 11-year low of 5 percent in 2020 after 6.1 percent in 2019. Investment and consumption declined. "The economy is in a downward spiral," says Vinayak Chatterjee, chairman of Feedback Infra, an infrastructure service provider. "A major intervention is needed to turn this vicious spiral into a positive growth and investment cycle."

Broadly speaking, governments have three important tools to intervene in economic and monetary policy, fiscal policy and structural reform. Of these, monetary policy has gone as far as it can with modest and slow results. By 2019, the Reserve Bank of India (RBI) cut the repo rate by a total of 135 basis points (1.35 percent), but lending rates did not follow. Now it was up to the government to use the moment of the budget and use the political levers to get more money into people's hands, in the hope that it would encourage them to spend and show private investors a way to profit. The broad consensus among economists and industrialists, however, is that this risk-averse budget may have missed the opportunity. There is also an ubiquitous feeling that the government has not overcome the massive crisis of confidence that is depressing the economy.

If the budget is cut conservatively, some positive measures must be taken to strengthen agriculture and infrastructure. The government has also announced plans to curb tax terrorism through its existing dispute settlement scheme and taxpayer charter, which defines the tax department's obligations and taxpayer rights. His decision to increase deposit insurance from Rs 1 Lakh to Rs 5 Lakh offers better protection to depositors, while incentives for startups with sales of less than Rs 100 crore should have a positive impact on the start-up. Likewise, the new income tax regime is a well-intentioned measure that targets a specific segment. However, these measures could be too complicated for an economy struggling to grow 5 percent, particularly given the government's declared ambition to almost double its size to $ 5 trillion by 2024.

The lack of resources is a major challenge for the government. The revenue collections failed to achieve their goals: net tax revenues fell by 1.45 billion rupees, while income from divestments fell by 40,000 billion rupees. Sales of GST alone were 51,000 rupees below target. This problem is exacerbated by the fact that the finance minister must keep the budget deficit within the limits imposed by the FRBM law, which dictates that fiscal slippage must be less than 0.5 percentage points in a year. As a result, allocations to some welfare systems have been significantly reduced.

Experts were also concerned about the government's methods of bridging the budget gap. For example, lending to the National Small Savings Fund has almost doubled, while deferred payments to public sector companies like the Food Corporation of India (FCI) are forcing these institutions to borrow from the market, making the actual deficit larger than the budget suggests. On the latter point, Maitreesh Ghatak, a professor at the London School of Economics, said the unpaid bill to the FCI was around Rs 2 Lakh Crore, while the budget deficit was Rs 7.6 Lakh Crore, which would bring the actual deficit closer to 5 percent of the GDP.

A key question is whether the budget stimulates demand enough to encourage industry to invest in new capacity. Adi Godrej, Chairman of the Godrej Group, said that budgetary provisions were not enough to get the economy going again. "The income tax cuts could have been made without a derogation," he says. Economists agree. "Tax adjustments could be successful to a very limited extent," said Madan Sabnavis, chief economist at Care Ratings. "It can especially benefit those with low incomes. If others choose to stick to the old regime, the status quo will continue."

Chatterjee also argues that the infrastructure push announced at the end of December may not produce the desired result. "The 102 billion rupee surge in infrastructure will generate local economic activity, but the impact will be staggered and slow," he says. "There is also a gap of 4 to 5 billion rupees in the infrastructure financing plan. Investors have not seen a credible financing plan." He also says that the budget could have taken a much bolder approach. "We spoke in favor of a financial institution for development aid," he emphasizes. "The budget could have followed the Kelkar Committee's recommendation to restore public-private partnerships in infrastructure."

In this context, the government has also tried to take structural measures to increase business and consumer confidence. One of these is the "vivad se vishwas (from dispute to trust)" system for settling around 483,000 direct tax disputes pending in various appointment forums. Under this system, taxpayers will be given no interest or penalties for controversial taxes if they pay by March 31, 2020. Related steps include the pledge to decriminalize failure to comply with certain provisions of the Companies Act, including the failure to return. But even in these cases it is important to carry out such measures – not to announce them. The government’s move to abolish dividend distribution tax has a similarly nebulous effect. Companies that distribute high dividends, such as For example, TCS or Hindustan Unilever have more cash in hand, but the tax burden on shareholders who are now responsible for dividend taxes is higher. In both cases, this cannot be seen as an immediate incentive for demand.

Some provisions have raised so much dust that the government has had a hard time clarifying them. Non-Indian Indians were alarmed to learn that those of them who did not pay taxes in other countries would be taxed in India in the future. A day later, the government made it clear that only income earned in India would be taxed.

Ajit Ranade, chief economist at Aditya Birla Group, says that while fiscal realities are difficult and there is no real scope for big-bang measures, the budget does not define the macroeconomic context and recognizes the difficulties facing the economy. The budget's key architects, however, defend the lack of big bang initiatives. Economy Minister Atanu Chakraborty says: "We should not be seen as a wasteful economy. We were realistic and this is a balanced budget." Although the government appears to be confident, this was not a perspective that markets shared on Household Day. FM Sitharaman, speaking on February 1, said that the budget would "increase income and increase purchasing power" and added: "Only through higher growth can we achieve this and employ our young people economically and meaningfully." However, the Sensex crashed the same day, closing almost 1,000 points – the steepest fall in over a decade.

Banking and finance minister Rajiv Kumar argues that the budget has brought about structural change that will create a more robust financial system. "We have corrected the mess in the banking sector. If you are dealing with deposit money, you have to be responsible. Cooperative banks have to go through banking regulation … all of this is part of the banking system cleanup," he says. The news is mixed in the financial sector. While the credit outflow could pick up, the government said 76 real estate finance firms increased their cumulative market exposure by rupees 82,121 over a period of two months through November 19. The previously announced initiatives seem to have stalled. For example, an NBFC securitization package announced last year has yet to be released. And although a 25,000 rupee real estate fund was announced last year, the State Bank of India, the country's largest lender, has announced that it cannot pay the money.

Still, Jayant Sinha, chairman of the standing finance committee, says that this budget "has something for everyone – farmers, industry, and taxpayers. It provides for tax cuts and infrastructure spending while maintaining budgetary discipline." This may highlight another problem. The Ministry of Finance has spread the government's already scarce resources too thinly to satisfy everyone. Another big problem is that the budget makes some very optimistic assumptions, such as that the government can make rupees 2.1 billion through divestment. The current record makes this number seem like a desperate hope, and the chances are even too high that the government will miss the disinvestment target this year. This is a significant problem since the total government spending in this budget is around 30 billion rupees, while net revenue is around 16 billion rupees. The balance depends on divestment income, non-tax revenue, dividends, and profits from public sector companies, which are uncertain at best.

It is clear that this budget is a missed opportunity to present a clear road map for the economy, and that the government's battered finances are severely limiting what it can do to get the economy going again. Perhaps the country will have to get used to a new growth standard, at least in the short term.