Nirmala Sitharaman’s record 160-minute long Budget speech a missed opportunity to revive a floundering economy

In her record 160-minute long speech, Union Finance Minister Nirmala Sitharaman presented the Budget for fiscal 2020-21 that made all the right noises but lacked a solid action plan. The Union Budget fell way short of expectations at a time when investors were waiting for a substantial fiscal stimulus to help an early recovery in the economy projected to grow 5 percent this year. The Sensex tumbled by over 1,000 points in the intra-day trade despite a few eye-catching announcements including the listing of Life Insurance Corporation of India (LIC) and personal tax cut, as none of the proposals was convincing enough for markets as a substitute for stimulus to revive demand in rural India, where consumer confidence is at multi-year lows. There was no money allocated for public sector banks (PSBs), no package for the manufacturing sector and nothing substantial to support rural demand. Last year, the PSBs were given Rs 70,000 crore much of which much went into the repair of cracked balance sheets ravaged by high non-performing assets (NPAs). This year even that wasn’t offered; instead, the finance minister asked banks to find money from the market. [caption id=“attachment_7988301” align=“alignleft” width=“380”] Finance Minister Nirmala Sitharaman presenting Union Budget 2020-21 in the Lok Sabha on Saturday[/caption] What the government ignores here is the fact that it is quite unlikely any investor will be willing to put in money in these banks, maybe with the exception of large ones. The markets would have forgiven the higher 3.8 percent fiscal deficit target if this was on account of a major stimulus spending, but that isn’t the case. For next year, the deficit target has been fixed at 3.5 percent. Even for rural development, the allocated money is just Rs 1,44,817 crore—mostly the same as the previous year’s allocation of Rs 1,43,409 crore.

The Budget is coming at a time when the country is witnessing unemployment rate at 45-year high and in her speech, Sitharaman acknowledged that by 2030, India will have the largest working population. The question then is: Who will give jobs to these new entrants?

Interesting proposals in Budget 2020 There are some interesting proposals such as the creation of an investment clearance cell. From the mention of it, this looks like the single-window clearance that the projects industry was seeking for long. But one needs to see the details. The creation of single-window clearance for infrastructure projects can do wonders to revive activity. The decision to sell part of government stake in LIC and list shares on stock exchanges is one big announcement made in the Budget and will be seen with a lot of interest by investors. This, along with the decision to sell government stake in IDBI Bank were positives. The optional tax cuts announced for lower and middle-income groups appear to be a major step but on a closer look, it is likely that there won’t be much gain for the taxpayers compared with what they get through the exemptions route. On the corporate side, the government has shifted the liability of Dividend Distribution Tax (DDT) from companies to individuals. Most of the schemes announced in the infrastructure space are a continuation of the existing programmes and needs a closer look. For instance, the Budget announced five new smart cities. What happened to the 100 smart cities announced in 2014? The unwillingness to infuse capital into the banks will be a major negative in a scenario where credit growth to the industries is at multi-year lows. If the economy is showing signs of revival and banks need to lend, the latter will be in a difficult position. The government continues to own 62 percent of the banking system in terms of assets. Sitharaman could have used this Budget as a big opportunity to announce a stimulus package to revive the economy and address the problem of falling rural demand. In that sense, the Budget is a missed opportunity for Sitharaman. Follow full coverage of Union Budget 2020-21 here