Muddling through

Finance Minister Nirmala Sitharaman’s Budget was an exercise in preserving diversity in more ways than one. Apart from having quoted poems in Kashmiri, Tamil, Sanskrit and French, the measures announced by her ranged from income tax alterations to fresh levies on e-commerce companies and foreign tour operators. All were token changes, snips and tucks, introduced at various levels with no meaningful thrust in any direction.

The only big bang announcement was the LIC IPO. It is imperative that this sale is done as quickly as possible, since the private players have already upped their game in this sector. Pulling off the IPO will in itself be a big task and the government’s track record so far has not been encouraging. Last year, disinvestment brought in only Rs.650 billion.

But then, because of the LIC plan, the disinvestment target has been pegged at Rs.2.1 trillion. It is a fairly huge number that can come in handy when the government is struggling to raise resources. Another big chunk of revenue the government has factored in is Rs.1.33 trillion from the communications department. This is presumably the pending receipts from telcos on account of the adjusted gross revenue issue.

Partly because of these lofty targets, the FM has not strayed too far from the fiscal path. She conceded the slippage to 3.8% of GDP for FY20, promising to bring it down to 3.5% in FY21, and drawing out a further consolidation path. A market borrowing of Rs.7.8 trillion, up 10% from Rs.7.1 trillion is not bad, something which will cheer the bond market, although the underlying revenue assumptions are ambitious. While disinvestment will be greatly determined by market conditions, the AGR issue may also need careful consideration given that this could result in Vodafone’s bankruptcy, dragging down a host of vendors and creating fresh bad loans for banks. But, prudence in managing the fiscal deficit as is projected now itself sidesteps the more important task of boosting growth.

Given the severe fiscal constraints, perhaps all the FM could have done was elevate consumer spending in whatever way possible. It has been amply clear for a while now that the investment cycle cannot be easily or quickly reversed, given the structural issues facing the economy and the fiscal constraints. The least that should have been done, therefore, was upping consumer confidence by putting a little more money in people’s hands. Although the Budget does indicate a direct tax give-away of Rs.400 billion by introducing new tax slabs, the give-and-take in the individual income tax levies, by slashing rates at every slab but undermining that by withdrawing exemptions, does not send a decisive signal to the consumer. Even the choice offered to taxpayers, to continue with the old scheme or switch to the new scheme, suggests lack of confidence in the revision. One needs to wait and watch if the results in the end will be any different.

Besides, the wisdom of creating a trade-off between availing a lower tax rate versus claiming exemptions is itself debatable, given that tax savings has been a key driver of investment in financial products such as mutual funds and insurance schemes. In fact, the whole culture around savings in India has been built around tax exemptions for years. While the idea of de-linking taxes and investing seems like a good one, channelising domestic savings into financial sector should at all times be a high priority for a country like India, where there is little to go into investments anyway.  

There were no other measures in the Budget to jumpstart sluggish demand, nothing for the auto sector that has been the biggest casualty of the slowdown. The other struggling sectors, too, have been ignored. While the FM did talk about farm income being doubled by 2022, farm subsidy has been slashed with no significant increase in allocation on other counts. There is a small comfort offered to non-banks through the Reserve Bank of India’s liquidity window for another year and to small and medium enterprises through hike in customs duty on certain items, but these may do little to reignite growth in any significant way. The infrastructure outlay remains as before at Rs.103 trillion, although the tax exemption for sovereign wealth funds investing in infrastructure projects with a lock in of three years is a positive move. 

Overall, it was wrong for the market to expect the moon from the FM. Foreign direct investment inflow continues to be a problem because of a combination of factors — supply glut, lack of competitive advantage and the complexity of doing business in India. So far, foreign portfolio investments have been strong because of global liquidity conditions, but if India’s growth continues to disappoint, those allocations may be pared, especially as a weak currency only ends up muting their return potential further.

Sitharaman’s choice of Thirukkural was bang on — a good country should be free from illness, have wealth, and give happiness and security (to subjects). Unfortunately, the Budget did not seem to address any of these in any appreciable way.