The most telling aspect of the budget speech was that the growth slump did not get a single mention
The day after the annual budget speech is disconcerting for an Indian economist. After being generally ignored for most of the year, suddenly friends and strangers seek opinions and ask for clarifications, explanations, etc. This is perhaps one of the occupational hazards of being an economist.
Requests to decode the budget reminded me of this lovely exchange Sherlock Holmes has with inspector Gregory in the The Adventure OfSilver Blaze, which chronicles the disappearance of racehorse Silver Blaze and the murder of its trainer:
“Is there any point to which you would wish to draw my attention?"
“To the curious incident of the dog in the night-time."
“The dog did nothing in the night-time."
“That was the curious incident," remarked Sherlock Holmes.
That the dog didn’t bark helps Holmes solve the case.
The key to decoding this year’s budget is similar to the curious incident of the dog that didn’t bark. Listening to this year’s speech was a surreal experience because it seemed like the finance minister’s generally upbeat and buoyant attitude was referring to some other economy. In the longest budget speech ever, not once did she mention the word “slowdown" or reference slowing growth rates, or a growth slump—phrases now recurring in the nightmares of economists and investors focused on India.
Instead, the finance minister’s mood was oddly self-congratulatory. She said: “We have moved on from a growth rate of just over 4% in 1950s to 6% in 1980s and 1990s. However, during 2014-19 we clocked growth of 7.4% on average with inflation, averaging around 4.5%. It is worthwhile to note that inflation was close to 9% in the last two decades of the last millennium and ranged 10.5% during 2009-14." She seemed pleased about a 4.5% growth rate, and completely skipped the high-growth period of 2001-2011, perhaps to avoid even the slightest comparison.
This lack of recognition by the government of any kind of slowdown is the key to understanding the 2020 budget. The rest, as they say, is just numbers. The missing acknowledgement of the current state of India’s economy suggests that the government is asleep at the wheel. Either because there is a genuine lack of understanding of the working of the economy, or because, despite some understanding of the slump, controlling the narrative takes priority, which is also a signal to the market.
So far, the former seems more likely, though markets will react similarly to both. A number of blunders have accompanied the most recent silence on the slump. Key government members have bragged that Indian growth rates are higher than China’s and the US’s—economies at a completely different stage of development. They have blamed sectoral slowdowns on millennials’ spending patterns. And, who can forget the chaos caused by misleading gross domestic product (GDP) and growth rate numbers with virtually no explanation from the government?
Aside from blunders, the government has done little to reveal its understanding of the economy and its plans for the future. Few are aware of its views on the reasons for the slump. The banking sector and its non-performing asset crisis sat like an elephant in the room as Indian poetry was cited. Nothing in the budget speech mirrored the warning signs in the Economic Survey tabled in Parliament. Major themes of the survey—expanding economic freedom in India and increasing the faith placed in the private sector—were left unaddressed. Not a single major sector of the economy has been liberalized or reformed towards greater economic freedom. This makes one wonder if the government is listening even to economists on its own payroll.
In a scenario where the government is fiscally constrained and cannot unleash a fiscal stimulus, the burden of any such stimulus, if there is to be one, falls on the states. Similarly, if the government cannot kick-start investment, there is a heightened reliance on private investment. A budget that does not explicitly address the growth slowdown and does not call upon the states and the private sector to work with the Union government on arresting downtrends is telling.
The big move to unleash some spending, especially in infrastructure, is to woo foreign sovereign funds to invest in India by giving tax exemptions and abolishing the dividend distribution tax. But these sovereign funds have teams of macroeconomists studying India and, like Sherlock Holmes, will notice the dog that did not bark. In the absence of a coherent narrative by the government on its fiscal policy over the next few years, and its plans to use other tools to address economic growth, investors usually assume the worst.
The Sensex and Nifty saw their biggest single-day fall in five years. Contrary to popular opinion, this was not because the government was fiscally conservative, for markets would have also reacted badly if it had been fiscally profligate. The reason for the fall is twofold. The government did not acknowledge that the situation is dire and that it cannot spend its way out of the current slowdown. The second cause was its lack of communication on a responsible way forward in these circumstances.
The finance minister spent much time speaking of “aspirational India, economic development and a caring society". But the house is on fire, and the lack of urgency or acknowledgement only makes it seem like naive daydreaming.
Shruti Rajagopalan is a senior research fellow with the Mercatus Center at George Mason University, US