Granular micro, fuzzy macro
The maiden budget presented by Finance MinisterNirmala Sitharaman was much looked forward to partly also because she is the first woman to hold this post, an achievement for our democracy. Though her speech was perhaps a little combative, by continuously asserting the achievements of the first Narendra Modi government, it was nevertheless marked by an even-handedness and attention to detail that is rare. The first is seen in the methodical way in which its author ranged over the areas manufacturing, ‘Grameen India’, ‘Shahari India’, women and the youth. One of the many instances in which the second was evident is in the elaboration of the proposed elimination of a human interface in the conduct of scrutiny for tax payers. But there is a disconnect in the budget and it is this. At the very outset of the budget speech the minister appeared to assert that India heading for a 5 trillion dollar economy by 2024. Much of the rest of the speech was concerned with what this economy would look like. There would be widely dispersed social and physical infrastructure, a low carbon footprint and housing for all among other desirable things. However, we are not told how we will get there. And getting there is important, for the things that are promised need to be paid for and there has to be the income for this.
If only five points in the budget are to be highlighted I would list bank capitalisation, rural electrification to be completed by 2022, a final push for water and sanitation making India open defecation free by October 2 this year, encouraging solar power usage and tax-related changes. Of these, electrification, water and solar power may not require large outlays but they make a large difference to people’s lives, a reality with political implications ably grasped by the Bharatiya Janata Party. The party portrays its actions in these areas as aimed at improving ‘the ease of living in India’.
The infusion of Rs, 70, 000 crores into the public sector banks would be a significant contribution to easing the liquidity situation caused by banks losing capital due to non-performing assets. It is mentioned that this will be accompanied by governance reforms, even though we do not know as yet what form they will take, which alone will determine how significant they will be. The package for the financial sector also includes a time-bound public guarantee to commercial banks that acquire assets of the presently troubled non-bank financial companies (NBFCs). This should bring some stability to the NBFC sector, instability in which would ruin the lives of hundreds of investors and choke lines of credit outside the banking sector. In case it is found that the capital infusion is inadequate, the government can always increase it later in the financial year, but to have intervened at this stage of the liquidity shortage is states(wo)manly. The proposals on taxation include changes in both tax liability and administration. The exemption limit on the income tax has been raised but a surcharge has now been levied on those in the highest two tax brackets. There is a balancing act here. Similarly, the upper limit for eligibility for the lowest slab of the corporate tax has been raised from rupees 250 crores to rupees 400 crores. This in in line with the demands of India’s corporate sector but it may not be what is best for the economy at a time when the government needs as much revenue as it can garner to quicken it. However, the budget may have initiated a new era with respect to the tax administration. Compliance is to be made easier for tax payer. There are to be pre-filled tax returns and less human interaction in the event of tax scrutiny. There will be ‘faceless assessment’ from the use of an electronic mode. Face-to-face encounters between inspectors and the assessee will be eliminated, with notices to be sent from a central IT cell. Some similar simplification is to be done in the sphere of the Goods and Services Tax too. The minister is right to speak of all this as a “paradigm shift” in the functioning of the tax department. While it is surprising that she equated the ease of paying taxes with the ease of living in India, which must take far more into account, it is the case that individuals have experienced powerlessness when dealing with the tax department.
The failing of this budget is in not setting out the means by which the government is to take the economy to the aspirational 5 trillion dollar level. Barring unforeseen productivity surges we must assume that investment holds the key. At least the Economic Survey tabled by the government on July 3 spoke of the importance of investment, even though it somewhat ideologically confined validity to private investment. But the budget has nothing to say on the matter. Perhaps it is believed that the very return of this government is sufficient to release the animal spirits of private investors. However, this would be to overlook the history since 2014. In this period there has been macroeconomic stability and much attention paid to the ease of doing business but private investment nevertheless declined. This points to the limits to confining yourself to the supply side when you are interested in growth, which this government is. Moving to a 5 trillion dollar economy by 2024 would require growing at a rate faster than the average that has been achieved since 2014. There is no mention in the budget of public investment, stepping up of which would be essential even to stimulate private investment right now. Capital expenditure has been raised by much less than the actual increase in the past year.
One way of seeing this budget is that it is good in parts. It describes with admirable practicality what we would like to see in India, from water connections to roads. But it is not convincing on how we can have the growth to afford them. We might say then that the macroeconomics does not gel with the microeconomics.