What the budget says and how it impacts you6 min read . Updated: 03 Feb 2020, 09:34 AM IST
- It was a usual budget, which could have been presented in any other year
- The BSE Sensex fell a whopping 988 points or 2.4% to 39,735.5 points
Finance minister Nirmala Sitharaman’s second budget was 18,971 words long. Yet the long speech was short on ideas that can push up growth which has slowed dramatically during the year. The lacklustre budget will further delay the goal of becoming a $5 trillion economy. Here are 10 things that you should know about this budget.
1) The proposals in a nutshell
It was a usual budget, which could have been presented in any other year. But when the Indian economic growth in nominal terms is at a two-decade low, (see graphic) what was needed was a special budget along the lines of the 1991 budget.
2) Will I be richer or poorer?
Maybe, maybe not. The budget introduced a new income tax system. The finance minister said in her speech: “In the new tax regime, substantial tax benefit will accrue to a taxpayer depending upon exemptions and deductions claimed by him." However, each taxpayer will have to do his own calculations to figure out under which system he or she will be better off. But on the whole, if you are the kind who uses more deductions while filing taxes, you will probably be better off in the old system.
3) What’s costlier, What’s cheaper?
As usual, the taxes on cigarettes will go up, with the budget raising excise duty by way of National Calamity Contingent Duty on cigarettes and other tobacco products. However, duty rates on bidis remain the same. At the same time, customs duty on imported footwear, furniture, wall fans, tableware/kitchenware made of porcelain etc., has been raised. This will make these imported products more expensive. Customs duty on imported newsprint has been cut to 5%.
4) Why did the stock market fall?
The BSE Sensex fell a whopping 988 points or 2.4% to 39,735.5 points. The markets had hoped for an abolition of the long-term capital gains tax on selling shares. There was no such move, and the stock market fell. Having said that, the budget did not totally ignore market expectations. The dividend distribution tax of 15% plus applicable surcharge and cess, on the dividend that companies pay their shareholders, has been done away with. But dividends remain taxable in the hands of the recipients at the applicable rate.
5) Will fiscal deficit targets be met?
Any budget is a balancing exercise. Hence, it is key to make reasonable assumptions in the process of drafting the budget. One of the things the government has spent a lot of money on in the last few years is the recapitalization of public sector banks. Basically, the public sector banks ended up with a huge amount of bad loans on their books. In this scenario, the government has to constantly keep investing fresh money (that is, recapitalizing) to keep them going. With accumulated bad loans of ₹7,79,347 crore, it is a given that the government will have to keep investing money in public sector banks. The thing is that the government seems to be assuming that all is well on the banking front. In 2020-21 it has allocated just ₹2 lakh (yes, just ₹2 lakh) towards recapitalizing these banks. This is bizarre. The government will continue to have to recapitalize public sector banks even in 2020-21. When the government does this, it’s expenditure will go up and this will push up the fiscal deficit, unless the government decides to cut down on some other expenditure. There is no free lunch in economics.
6) Who gains from this budget?
The deposit insurance on bank deposits since 1993 has been at ₹1 lakh. This basically means that if any bank were to go bust, deposits of up to ₹1 lakh are insured, irrespective of the total amount of money that any depositor has in the bank. This is a good move given that it has been 27 years since the last increase and should help remove any fear in the minds of depositors. In last year’s budget, the finance minister had allowed an additional deduction of up to ₹1.5 lakh on interest paid on a home loan for an affordable home. This deduction has been made available for 2020-21 as well. Anybody buying a house by taking on a home loan can benefit from it.
7) Who stands to lose?
It was widely expected that the government will increase the allocation towards Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), putting more money in the hands of the poorest of the poor. The poor have a higher marginal propensity to consume than the middle class and the rich, and their spending would have helped revive parts of the rural economy. The allocation to MGNREGS in 2020-21 stands at ₹61,500 crore. This is significantly lower than ₹71,002 crore that is to be spent on MGNREGS this year. Ironically, the Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) scheme gets an allocation of ₹75,000 crore in 2020-21, against the ₹54,370 crore to be spent in 2019-20. Clearly, the government seems to favour land-owning farmers than the poorest of the poor seeking work under MGNREGS.
8) Is the govt hiding some things?
Indeed it is. Take the case of Food Corporation of India (FCI). FCI buys rice and wheat from farmers at a minimum support price, and sells them through the public distribution system. The government needs to compensate FCI for the difference in prices. It does so through the food subsidy in the budget. The allocation for food subsidy in 2019-20 was ₹1,84,220 crore. It has been revised to ₹1,08,688 crore. This is a cut of over ₹75,000 crore. FCI’s food subsidy claim in 2019-20 stands at ₹3,17,905 crore. Even if the entire food subsidy amount of ₹1,08,688 crore were to go to FCI, there would be a gap of ₹2,10,000 crore. In order to continue to operate, FCI needs to borrow this money from the financial system. By not paying FCI on time, the government reduces its expenditure and fiscal deficit. The same formula has been adopted for 2020-21. The total allocation towards food subsidy is ₹1,15,569 crore. The total food subsidy that FCI needs to claim is ₹3,08,860 crore, a gap of close to ₹2 trillion.
9) Is the budget populist or reformist?
Populist. The central government hopes to spend ₹30.42 trillion during the course of 2020-21. This is 12.7% more than the total money that it is likely to spend in 2019-20. In 2019-20, the central government is likely to spend ₹26.99 trillion, which is 16.6% more than the money it spent in 2017-18. To that extent, the budget for 2020-21 may not seem as populist as the one for 2019-20 was, but given that it plans to not pay around ₹2 trillion to FCI, it is actually as populist a budget as the last one. Also, the reforms are few and far between. The government remains as bloated as ever with the launch of more new schemes, without the capability of implementation of the existing ones being taken into account.
10) Could it have been better?
Of course, it could have been better. An increase in allocation to MGNREGS to around ₹1 trillion would have made sense, especially when money allocated to PM-Kisan hasn’t been fully spent. Over and above this, the government could have done something about the huge land banks that it owns through various public sector enterprises, which aren’t going anywhere. This could have been a revenue spinner. The off-budget borrowing of FCI continues in 2020-21. This is something which has become so big that it can’t be possibly cleaned up in a single year. Finally, the new income tax system prevailing along with the old income tax system just makes the entire regime even more complicated.
Vivek Kaul is an economist and the author of the Easy Money trilogy.