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Photo: ANI
Photo: ANI

Opinion | A fatigued budget that does little to quell defeatism

The budget should have found ways to tap household savings through tax-saving instruments

They sowed the duller vegetables first, and a pleasant feeling of righteous fatigue stole over them as they addressed themselves to the peas.

—E.M.Forster, Where Angels Fear To Tread

As finance minister Nirmala Sitharaman wiped her brow and falteringly repeated the same lines from her budget speech, inviting anxious looks from both sides of the aisle in Parliament on Saturday, the pall of fatigue that has bedevilled India’s economic administration and policy-making machinery for some time was finally manifest. As victims, the Union budget for 2020-21 and The Economic Survey for 2019-20 also confirm this trend.

The state of the economy had generated hopes of a chart-busting budget that was expected to not only comprehensively quash the “defeatist" narrative about the economy but also stimulate the economy by altering the past decade’s restrictive architecture, even if for a short while. This was supposed to be a make-or-break budget; instead, there is more of the same. A pervasive shroud of ennui envelops policy-making, which seems bereft of any innovative thinking and appears to have become a prisoner to anachronistic ideologies.

The crucial thing is that, like the Forster quote above, inertia has set in just when some of the important work needs to be accomplished, when the course has turned difficult and needs an audacious strategy. Even the stock markets wilted during trading on Saturday, though this could be a one-off admission of weariness, with regime-friendly brokers and foreign investors preparing to rally behind the indices later.

It’s not that the budget lacks ideas; it is full of concepts and policies which yield results only in the medium term. But that is a risky proposition because, in the meantime, it allows the demon of negative expectations to dig in deep which then takes a long time to retrench.

Everybody had expected the budget to provide an economic stimulus plan that could spur employment, generate income, boost consumption, revive investment and restore growth. These hopes have been dashed. For example, there seems little to stoke rural demand. The 2020-21 allocation for agriculture, irrigation and rural development at 2.83 trillion is flat, compared to both budget estimates and revised estimates for 2019-20. Instead, there is some fanciful chatter about public-private partnerships building hospitals in “aspirational" districts.

In fact, barring a couple of items, the budget is actually contractionary in many ways. Total expenditure during 2020-21 is budgeted at 13.52% of GDP, against 13.2% achieved in 2019-20, with undue dependence on future privatization to finance the additional spending. This is the unspoken risk in the budget document. A Goldman Sachs report on the budget says the market wants to see “progress in implementation".

A June 2016 article by three economists from the International Monetary Fund weighed against established wisdom on fiscal austerity and stated that, in many cases, fiscal consolidation—a place-holder for shrinking fiscal deficits and absolute debt levels—had resulted in rising inequality, thereby hurting growth. And while Sitharaman has pressed the trigger on fiscal slippage, slow growth in gross domestic product (denominator) is forcing her to slow down on spending (numerator) to stay on the right side of Fiscal Responsibility and Budget Management Act. A Credit Suisse report shows investment outlay for roads and railways (including estimates for extra-budgetary resources and public-private partnership allocations) has risen by just 1%.

In fact, the budget is hostage to another pro-cyclical fallacy: it is ceding space in critical areas during a slowdown to make room for private investment. Ordinarily, this might have worked; but we are living in extraordinary times, especially politically volatile times, and private sector investment in infrastructure, including by sovereign wealth funds, might seem a bit uncertain. The optics of India as an investment destination has not been promising, especially with policy flip-flops and ministers venting against multinational investments.

The budget framework seems rife with internal contradictions. Individual taxpayers now have tax breaks they can enjoy only when they give up exemptions granted earlier. This is odd for an economy that clearly needs large-ticket spending on physical and social infrastructure, and on new manufacturing capacity. With resources limited in both government and private sectors, the thrust should have been on channelling higher household savings, through tax-saving instruments, for creating new assets. In such a situation, to disincentivize household savings through a confusing personal tax structure seems quite odd, especially when gross household savings have been consistently falling throughout this government’s term: from 20.3% of GDP in March 2014 to 17.2% by March 2018.

This also goes against the theory that human beings respond to incentives and disincentives and that government policy needs to calibrate both levers to pursue a given development path, which is an increased investment ratio in this case.

On balance, though, the budget design is heavily loaded in favour of corporate tax incentives rather than the ordinary man. The rhetoric about the poor and disadvantaged is now beginning to sound rather thin, and somewhat tired.

Rajrishi Singhal is consulting editor of Mint. His Twitter handle is @rajrishisinghal

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