In Twenty20 cricket matches, a batsman hardly gets the chance to settle down and is expected to hit fours and sixes as soon as he arrives on the crease. In her 2020 Budget, Union Finance Minister Nirmala Sitharaman tried to play a Test match, retired hurt without finishing her innings and her score didn’t impress anyone — least of Dalal Street that witnessed a bloodbath. As markets closed on Saturday, Sensex was down by nearly 1,000 points and about Rs 3.6 lakh crore of investor wealth was wiped out in a few hours.
This is somewhat surprising, given the fact that the finance minister batted on for nearly two hours and 45 minutes to deliver the longest-ever Budget speech — at the end of which she became unwell and failed to read out the last two pages — and tried too hard to please everyone. And as it invariably happens when one tries to do that, she ended up satisfying none.
In the midst of India’s worst economic slowdown since 2012-13 blamed in some parts over demonetisation after-effects and lag-effect of a flawed GST, Sitharaman needed to hit the ball out of the park as batters do in T20 matches. Instead, her careful grafting and granular approach gave the impression of a government still relying on cautious optimism and refusing to acknowledge the extent and nature of the slowdown that has pushed Indian economy to the brink of a stagflation.
The most intriguing thing about this Budget is that though the finance minister’s efforts in trying to boost consumption, trigger private investment, meet disinvestment targets, stress on infrastructure spending, encourage entrepreneurship, give relief to middle-class taxpayers, push health, education, skill development, technology, doubling farmers’ income and addressing industry concerns are evident, she fails to go far enough in any of these spaces and falls short in announcing that one game-changing idea that would have fired market sentiments and helped release the animal spirits.
On Friday, the day before the Budget, chief economic adviser of India KV Subramanian suggested that the government should take a long-term view and do away with fiscal discipline temporarily to revive growth. Given the fact that India’s macro-economic stability is not in question, relaxing fiscal gap, prioritising growth and then consolidating expenses was considered by many to be a viable plan. Opinions, however, differed on whether the government should give more money in the hands of consumers to trigger consumption (and boost the economy), or spend on infrastructure and streamline its rules to ensure that the rupee travels further.
In balance, Sitharaman tried to do both and succeeded in neither. The finance minister’s move to rejig the direct tax structure and introduce more I-T slabs further muddles the already complicated individual taxation system and all her concessions come with conditions that resist back-of-the-envelop calculations. Simply put, while the new regime offers tax reductions, it also does away with 70 exemptions that make broad assumptions impossible.
According to the Budget speech, “In the new tax regime, substantial tax benefit will accrue to a taxpayer depending upon exemptions and deductions claimed by him. For example, a person earning Rs 15 lakh in a year and not availing any deductions, etc. will pay only Rs 1,95,000 as compared to Rs 2,73,000 in the old regime. Thus, his tax burden shall be reduced by Rs 78,000 in the new regime. He would still be the gainer in the new regime even if he was taking deduction of Rs 1.5 lakh under various sections of Chapter- VI-A of the Income Tax Act under the old regime.”
While this is true, the scenarios would wildly differ in accord with slabs. As S Murlidharan explains in Firstpost, for a salaried person with a gross annual earning of Rs 7.5 lakh, the old regime will mean a lesser tax burden if he avails all exemptions, but at higher levels, the new regime might be more attractive.
While tweaking of the tax regime may put marginally more money in the hands of the middle class, the policy won’t go far enough in encouraging the consumer to spend. Given the state of the economy and the possibility of a hike in interest rates in the near future, he may be tempted to save rather than spend it. That doesn’t help the economy.
The second option that the government had was to target sectors such as manufacturing, infrastructure or real estate that are income generators and have a domino effect on economy, and pump prime these sectors so that the engines of economy start moving. Sadly, here again, Sitharaman falls short. The budgetary outlay for infrastructure is only marginally higher than last year and frugal rural spending won’t be enough to revive the rural economy.
The one big plus idea that may bring much-needed capital into infrastructure (that creates jobs) is the decision to allow sovereign wealth funds to invest in infra projects. As Fortune India points out, “Budget gives sovereign wealth funds 100 percent tax exemption on dividend, interest and capital gains on their investment in infrastructure before March 31, 2024, with a minimum three-year lock-in.”
The decision to shift the burden dividend distribution tax (DDT) from investors to recipients may increase the attractiveness of the Indian credit market but the taxpayer will have more to pay. The finance minister also breached the fiscal deficit target and projected it at 3.8 percent in 2019-20 and 3.5 percent in 2020-21 but weak growth and poor tax collections may make achieving those targets difficult. And here lies the greatest disappointment with the Budget.
Given the government’s financial constraints and the state of the economy, Sitharaman could have set the fiscal deficit at 4 percent of GDP and gone in for a substantial hike in infrastructure spending but the lack of boldness and conviction in her decisions was evident in the way these were restricted into baby-steps. The markets and investors were looking for a big, bold statement from a finance minister who is part of a government that has a strong political mandate. In choosing to be conservative, the FM and India have lost an opportunity.
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Updated Date: Feb 01, 2020 20:40:17 IST