A government that is clueless on the economy

Listening to the Budget speech, one would hardly get any indication of either the economic slowdown or the unemployment rate, which is the highest in decades

It has long been suspected that the Narendra Modi government lacks a deep understanding of India’s economy, how it works and how to assess its condition at any point in time. Finance Minister Nirmala Sitharaman’s Budget speech of over two-and-a-half hours was mainly an exercise in tom-tomming the achievements of the government, particularly “the Prime Minister”, with an announcement of some income tax cuts thrown in for good measure. It was difficult to find in it either the gravitas fit for the occasion, the annual Budget presentation of a country of 1.3 billion people, or the economic intelligence necessary to address the present, two attributes one would expect.

Low on economic intelligence

In a Budget speech, the government is expected to provide a review of the state of the economy and how it will be addressed via revenue and expenditure operations being proposed. After Manmohan Singh’s performance in 1991, the country expects a slightly higher level of economic intelligence, if not analysis, on display in the Union Budget. While not all Budget presentations since have measured up to this standard, this one fails miserably. Going by the Budget’s thrust, the government is either clueless as to what the economy needs right now or has chosen to brazen it out. The slowing of the economy has been remarked upon for at least two years by now, and the cries have by now almost reached a crescendo. Slowing growth is only part of the story. Less visible in the data optics is the high unemployment rate, the highest in close to half a century. Listening to the Budget speech, one would not get the slightest sense of this. We are told that the fundamentals are strong, that the economy is set to attain the projected $5 trillion level on time, and that the government is committed to macroeconomic stability (read ‘deficit reduction’).

Modinomics and tax reforms

This Budget only takes forward ‘Modinomics’ with its emphasis on ‘minimum government’ and fascination with digitalisation, IT start-ups and foreign direct investment. There is room for all of these on their own but to think that they make up a package of measures to address the present state of the economy would be naïve. If there is a core to the Budget, one that may be taken as the strategy it embodies, it would be the attempt to stimulate growth through tax reforms. The Budget is quite elaborate in this area. It proposes a simplification of tax filing for both firms (the Goods and Services Tax) and individuals (Income Tax) and speaks for amending the IT Act to allow for a “taxpayer’s charter” which will set taxpayers free from harassment, for the Finance Minister a sequel to the ending of the “dreaded inspector Raj”.

Then there is the ‘Vivaad se Vishwas’ scheme to settle tax disputes speedily and smoothly; tax compliance is to be strengthened; the tax refund process simplified; and taxation of Employee Stock Options (ESOPS) deferred for up to five years. But the cherry on the cake is surely the reduction of the income tax rates on income less than ₹15 lakh, which the Finance Minister clarified will leave income tax rates in India the lowest they have ever been. By lowering the income tax rate, the programme of cutting taxes which had commenced with the lowering of the corporate tax rate in 2019 has been carried forward. We are not given the rationale for the tax cut, perhaps because that would draw attention to the fact that the economy is slowing and the target of $5 trillion by 2025 is unlikely to be achieved now. But one thing is clear. An income tax cut is unlikely to restore the rate of growth to the level at which it last peaked, around 8% in 2016-17. Actually, the question is whether it will even reverse the current slowing. Income taxpayers are such as small percentage of the population that the size of their purses is unlikely to make a serious enough dent on the fortunes of the economy.

Need for public investment

The present moment in India had called for a Budget that implements an expenditure thrust in the form of greater public investment. The Minister repeated the government’s statement, made last year, that there will be ₹100 lakh crore worth infrastructure spending in the next five years but did not refer to a specific infrastructure spending plan in this Budget. This is not surprising as the ₹100 lakh crore is to be made up by substantial private outlays projected under Public Private Partnership (PPP). PPP, as a mode of building infrastructure, was first envisioned during the United Progressive Alliance’s second term, and has shown itself to be an unviable arrangement. There is no reason to believe that it will succeed this time.

While infrastructure spending is what will determine the long-term trajectory of the economy, the immediate growth impact of the Budget will be governed by the spending over revenues or the ‘fiscal deficit’. We are told that the revised estimate for this deficit in the current year is 3.8% of GDP and the Budget estimate for 2020-2021 is 3.5%. If a fiscal deficit of 3.8% could not prevent the economy from slowing further last year, reducing it is only likely to aggravate it. There is of course always the possibility that private investors are sufficiently enthused by the Budget to spend. Early indications from the stock markets is that this may not be the case.