Home > Budget 2019 > Opinion > Opinion | Sitharaman’s second budget must do what the first didn’t

On Saturday, finance minister Nirmala Sitharaman will present the second budget of the National Democratic Alliance (NDA) government after it returned to power last year. Conditions have changed quite dramatically since her July 2019 budget. That budget came amid an exultant mood following the NDA’s emphatic electoral victory. The government’s target of a $5 trillion economy in five years was a reflection of that euphoria. This budget, however, comes against the backdrop of a sinking economy amid rising inflation, poverty and unemployment.

A large part of the blame for this shift in outlook in just six months lies with the government, which, despite ample evidence of distress in the economy over the past five years, ignored the warning signs. Its actions subsequent to the budget only worsened the situation, while weakening its ability to intervene. A recent giveaway was its corporate tax cut, which has now come to haunt it through a significant decline in direct tax collections—the first in more than two decades. This has triggered a panic reaction, leading to a sharp cutback in government spending, even though such spending is essential for reviving demand. Social sector spending, for instance, the bulk of which is aimed at the poor in rural areas through such programmes as the National Rural Employment Guarantee Scheme (NREGS), has seen a cutback, according to data, at a time when rural distress is at its peak.

Since the recent sharp slide in the economy is primarily a result of a decline in consumption demand, the best way to revive it would be by increasing public expenditure. While this situation has arisen due to short-sighted policies and a misdiagnosis of the problem, the solution does not lie in cutting back essential social sector expenditure, but in enhancing it. This is not only necessary to revive demand in rural areas, given the large multiplier impact of such spending, it also provides a social safety net for the rural poor, who are struggling with reduced incomes, high inflation and rising unemployment.

With inflation likely to remain high for some time now, monetary policy is unlikely to help boost either demand or investment; more so with the financial sector under stress and credit flows having slumped to their lowest level this decade.

While critics and rating agencies may frown upon an expansion in the fiscal deficit, it is the only way out of the economic mess. What matters in the long run is not the extent of the fiscal deficit, but the quality of government spending. If the deficit is a result of public expenditure that raises demand in the economy, it will lead to higher revenues in subsequent years. It will also generate demand for investment and increase savings in the medium to long term. Such a rise in public expenditure can easily be funded by rationalizing taxes. These are currently highly skewed in favour of large corporations at the cost of small and medium enterprises (SMEs), even though it is the latter which hold the key to an economic bounce-back. Reviving SMEs is not just a necessity for reviving demand and investment, but also for employment generation at a time when unemployment rates are at five-decade highs.

This budget is also an opportunity for the finance minister to come clean on the basic economic aggregates presented by the government. Doubts have been raised, for instance, on the true extent of the fiscal deficit, while discrepancies between estimates of the Economic Survey and the budget are puzzling. Similarly, the practice of reaching out to public sector units for greater dividends to shore up government receipts—which are falling short in the wake of low revenues and sluggish disinvestment—is hurting these companies. The credibility of most economic data is under doubt. It is important, therefore, for the government to present a true picture.

A budget is essentially a statement of government accounts. But it is also seen as a declaration of its economic priorities. While there may be little room for large-scale reforms, this budget could signal the NDA’s approach to reviving the economy. To do so, it has hardly any option but to hike public expenditure in rural areas and lend support to SMEs. There are numerous ways of raising revenues and rationalizing expenditures to fund this spending. The issue, therefore, is not how this can be done, but whether the government has the economic sense and political will to do so. We will know on 1 February.

Subscribe to newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaper Livemint.com is now on Telegram. Join Livemint channel in your Telegram and stay updated

My Reads Logout