Union budgets presented by finance ministers of the Indian government remain a wieldy spectacle even if important decisions that used to form part of the budget are now outside its ambit, such as major elements of indirect taxes. Further, the combined spending of the various states exceeds that of the Union government. So, we may be parsing the budget far more than it deserves. Second, we don’t get much time to parse it. Budget documents are uploaded shortly after the speech is delivered, and then commentators try to make sense of the numbers and the speech over the next two hours. So, most commentary might simply end up reflecting inherent and pre-existing biases rather than informed analysis.

The budget for 2020-21 was expected to meet two or three important criteria. One was that it should enhance transparency and improve the credibility of its numbers. By expanding the scope of a key data tableand presenting details of fully-serviced government bonds and loans availed from the National Small Savings Fund (NSSF), not just for 2019-20 and 2020-21, but for the past four years, the government has taken giant strides towards reporting its off-budget borrowing. Equally importantly, it has pencilled in a much smaller increase on this score for 2020-21, signalling that it would like to freeze its recourse to off-budget borrowings, which had ballooned in 2018-19 and in 2019-20. It has made it a lot easier for many to report the “true" fiscal deficit.

Second, the government was expected to put money in the hands of the public. The number of tax slabs might have increased now, but the substantially lower tax rates with zero exemptions is a big move forward in putting more money in the hands of people and in making filing tax returns a less stressful exercise. That said, easing business and living conditions remains an urgent priority for state and local governments. Formalization of micro and small businesses remains a herculean task. That is why many give up growth aspirations and operate below the radar. The key to unlocking productivity gains lies in easing local and state-level compliance and regulatory requirements.

Third, the government was expected to raise more money by selling its assets. It has signalled its intent by budgeting a large sum on this score. It also needs luck in the form of better market sentiment next year, not just in India but globally. Other positives include the treatment of employee stock options in startups, liberalized conditions on the exemption of startup profits, the far-sighted decision to provide exemption from tax on dividends in the hands of sovereign wealth funds for investments made in India up to 2024, and the taxpayers’ charter.

Considerable thought has gone into the budget’s announcements on higher education. One hopes that the right set of incentives are framed for attracting foreign direct investment (FDI) into this sector. Retaining its “not-for-profit" status would be inconsistent with the desire to attract FDI.

The government has also promised fresh approaches on its credit guarantee extended to non-banking finance companies, and on transparency, accountability and governance of government-owned banks. The sooner the better. As per the Reserve Bank of India’s Financial Stability Report of December 2019, the amount of large frauds (greater than 50 crore) has gone up by more than seven times in a little over five years. The share of public sector banks in the frauds reported is nearly 90%. India’s growth slowdown is mostly (if not fully) on account of these two sectors. Hence, these two are in crisis. Crises are reform opportunities. They need to be grasped.

The government faces two major challenges. One is the economic growth challenge and the other is its fiscal challenge. Technology and data are being harnessed to augment government revenues. In the same spirit, expenditure reforms must be undertaken to ensure that government expenditure is both reasonable and purposeful.

The growth slowdown is not of its making. Recent research—albeit based on a small sample—shows that the effect of demonetization on growth was transitory. Two, by facilitating higher recovery of failed loans, the Insolvency and Bankruptcy Code has actually lubricated the financial sector, rather than gumming it up. Third, the effective tax rate under the goods and services tax had come down since its inception. That counts as a stimulus, and not as a drag on economic activity.

Economic slowdowns originating in financial sectors tend to run deeper and longer. For international evidence, readers should refer to the paper, Financial Crises And Economic Activity by Stephen G. Cecchetti and others, published in September 2009. Further, The Economist notes that all emerging economies are experiencing a prolonged productivity slowdown, contributing to slower economic growth (The Economist, 16 January 2020). Both economic growth and productivity slowdowns, thus, are not unique to India.

Restoring governance and trust in the financial sector, improving living and operating conditions on the ground for citizens, and small businesses will go a long way in addressing both the growth and fiscal challenges for India.

*V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister. These are the author’s personal views.

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