Union Budget 2020 India; The FM needed to have measures that would have fuelled the revival of private investment.
Union Budget 2020 India: A lot of fuss is made about budgets.It is the only occasion when the media try to translate the intricacies of economics into what it means for you. But, the budget is an accounting exercise, not necessarily of economic significance. The budget is a financial statement, telling the world that the government’s books are balanced. The Indian government’s financial practices have been dubious for decades, and tricks (like not paying the bills on time) have been used over the years to balance the Budget or, at least, bring the declared deficit to a modest level. All this window-dressing may have no economic significance. A balanced budget could be bad for the economy and deficits not just inevitable but necessary.
Last year’s budget was unique in that subsequent weeks saw revisions and additions to the original budget. This is indeed as a Budget should be from an economic perspective. An ideal economic budget would have fuzzy figures because expenditure over the next twelve months has to be hard to know for certain. Like the polling results, one should say ±3%.
The central fact this year is that the economy is at the bottom of a growth cycle. The reason for the slowdown is the crisis in the credit market. The disastrous PSU banks have been irresponsible enough to amass a pile of NPA which restricted their lending. Add to that the crash in non-bank credit market. It was this which brought the growth cycle to an end after six years.
Even so, it is a growth cycle. Normally, a recession means decline in national income, negative growth rate. India has now arrived at a stage where our expectations are so high that we regard a 5% growth as a crash. The most important transformation is that the Indian economy is no longer driven from the top by state economic activity. India has become a private-sector-led economy like most other economies. The state can give a push, fill up the tank but it no longer drives the car.
This change in the character of the economy is not understood by the government or, indeed, the entire party political system. Too much attention is paid to MNREGA or infrastructure investment, but not enough to the course of the private sector investment.
Nirmala Sitharaman had a more assured performance at this year’s Budget than she did last year.
Budgets in India suffer from the fact that rather than concentrating on the crucial macroeconomic problems of the economy and suggestions for tackling it, the FM needs to go through a long department-bydepartment account of expenditure , arriving at the end of a long and exhausting lecture to the heart of the matter. In the UK, the departmental schemes are dealt with by the relevant ministers after the Chancellor has given the Budget Speech. India should seriously think of this change. A two-and-a-half hour Budget Speech with barely twenty minutes of serious policy analysis is a bad way of explaining policy.
Sitharaman was being watched for how she would tackle the growth recession. The Economic Survey had nudged the growth forecast to 6-6.5%, but that would be with a standard error of ±1%. Hence, most likely, no significant increase on last year’s 5%. Tackling growth recession required a revival of private investment both by long-term investors and short-run sellers of consumer durables.This meant easing credit conditions by pumping liquidity into the market for bank and non-bank lenders as well as cutting interest rates. Fiscal policy, by cutting corporation taxes, was tried last year, but has not worked. There is plenty of evidence from across the world that corporation tax cuts do not boost business investment.
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This year, the FM followed up with mild income tax cuts which will no doubt catch the headlines, but not have much impact. India needs to find an alternative to the income tax. But that would require a long, hard look at the entire structure of taxation. There is evidence that consumers are not buying durables—two wheelers or cars—because of scarcity of credit.
The unsaid problem concerns the importance of economic goals in the government’s priority list. It is rumoured that the swadeshi lobby is out in force within the BJP and wishes to put a damper on FDI. The small, but peculiar, protectionist gesture of taxing imports of medical equipment because India now had an adequate domestic supply made no sense except as a signal that this is the way of the future.
Let me say, this was tried by the Congress during its first 40 years of rule and it confined the economy to a low growth rate labelled the Hindu Rate of Growth. Perhaps ideologues of BJP love low growth rates as the Congress ideologues used to.The Hindu Rate of Growth returns as the Hindutva Rate.
The writer is prominent economist & Labour peer