India’s fiscal budget needs to be improved to prevent a further slowdown

The Indian middle class will count a few rupees, bank deposits will get a little security, and privatization enthusiasts will chew on a new player in the market. But other than high-sounding grandiose statements, Indian Budget 2020 has delivered no expectations. This was preordained, of course. If anyone is feeling disappointed, clearly that person is not reading the economic signals or the government’s approach to the economic situation with the right view. The major problem is that India’s Finance Minister Nirmala Sitharaman had little room for a creative maneuver. Her budget just shows how little room that is. No analyst with the right mind-set anticipated that Sitharaman’s second budget would or even could deliver on-ground change and help kick-start the economy. But after the inspiring economic survey – a document that has in our opinion zero-actionability but is one of the most read texts in figuring out the mind of governments – was tabled in Indian parliament on January 31, 2020. Honestly, we were expecting a bit more than lip service to wealth creation.

At a time when removal of hurdles before businesses is the crucial conversation and economic growth has been slowing down consistently, the budget, even if it did not yield immediate returns, should have in our opinion signaled the government’s intent to reform. It should have addressed the series of crises that entrepreneurs have been facing, from real estate to finance to manufacturing to infrastructure. None of that really happened.

Instead, the government rattled on the same-old politics dominant sloganeering. Aspirational India is defined by agriculture, irrigation, and rural development; wellness, water, and sanitation; and education and skills. Caring society focusses on woman and child; social welfare; culture and tourism; and environment and climate change. And economic development is all about industry, commerce, and investment; infrastructure; and new economy. Of the three, only the last has in our opinion the ability to turn India’s economy around.

What an economy generally needs from the government is to help catalyze entrepreneurial ideas and turn them into wealth, if not drive animal spirits.

In this way, businesses build enterprises, create urgently needed jobs and pay taxes for wealth redistribution. For Indian entrepreneurs, the expectation scale is even lower. All they seek is to reduce the administrative burden in doing business, from laws and rules to compliances and filings.

These needed reforms lie outside the budget, but Sitharaman has done well to list them out. The Investment Clearance Cell is yet another institution that this budget creates. But if past track record is any indication, it will not “create more opportunities” and “remove road-blocks”. It will in our opinion clear nothing but create another layer of bureaucracy. Likewise, with the five new “smart cities”. That she hopes to work with states to create them is a good sign; but the state of the earlier 100 smart cities makes us skeptical about where these five will go.

On infrastructure, as predicted, the RS 100 trillion (1.4 trillion USD) number has once again been hurled at us. A positive note here is the first detailing of this number, which include accelerated development of highways, electrification of 27,000 km of tracks and suburban projects in railways, and waterways. New announcements need new jargon. This year’s is: new economy, comprising artificial intelligence (AI), Internet-of-things (IOT), 3D-printing, drones, DNA data storage, quantum computing, and data parks. Behind the new jargon (4th Industrial Revolution), however, the policy minds craft out the old.

The one idea the budget has pushed forward that will in our opinion do well is to sell a part of government holding in Life Insurance Corporation by way of an initial public offer. This will have four positive implications.

First, it will fetch money for the government.

Second, it will deepen the stock market on listing.

Third, it will enter the Sensex and change its composition and weighs.

And fourth, it will force this never-reform organization to change.

Finally, in terms of changes in divext taxes for individuals, Sitharaman has done what had been recommended: reduce the rates and remove the exemptions and deductions, as she did for corporations in September last year. Further, by increasing the number of tax slabs to five from four in her previous budget and to eight from five in Budget 2020, what she is telling us is that she seeks complexity of tax laws and its accompanying compliances – not simplicity. In a way, she is replicating the complexity of rates in GST (Goods Service Tax) and transplanting it on individuals.

Along with the government in general, therefore, Sitharaman remains trapped in the policymaking thought-traps of the 20th century – command, control, coerce. Instead, she needs to carry India in our opinion to the 21st century policymaking – simple, effective, easy to pay, and easy to file. There is much fine print here and a future column of Calvin • Farel will explore this in deeper detail.

The other small policy change she has bought in budget 2020 is to increase the protection to deposits by account holders to RS 5 lakh (= 6,500 USD), from previous RS / lakh (=1,300 USD). This in our opinion has taken too long to come and is still inadequate.

At the macro level, the budget boldly states, will deliver a nominal GDP growth of 10%, a fiscal deficit of 3.8% for 2019-20 and 3.5% for 2020-21. On the former, we are not holding our breath; on the latter we remain unimpressed. Almost a thousand points down, the Sensex elegantly captures the short-term impact of shifting the burden of dividend distribution tax to recipients from companies. While this is best ignored, as such a luxury exists only when the economy is growing, not when it is faltering.

Out of tune with the harsh reality of slowdown that many turn into a recession ahead, out of sync with wealth creators and their problems, out of sight as for as economic growth is concerned, and out of beat with the real aspirations of India, Sitharaman’s 45-page document remains steeped in the past. Hopefully, other policies during the course of the year will help perk up growth.