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Budget: Long in duration, short on reforms

The first full budget of Modi-2 government has been a disappointment. Rarely since 1991, has there been so much anticipation and curiosity about the budget as this year. The reason being, 2019 has been a difficult year for the Indian economy and the finance minister (FM) had a difficult task of providing a stimulus to boost growth in a limited fiscal space.

Between the previous budget presented on July 5 and the latest on February 1, the finance minister announced a series of incentives for the economy: a tax cut for corporate India and new manufacturing companies, reforms in GST law, capital infusion for PSU banks and setting up of a fund for real estate and infrastructure.

However, economic indicators have not shown signs of growth revival so far and the government’s tax collections have been on lower side of the budget estimates. Therefore, a lot of hopes were riding on Budget 2020 to reverse the current slowdown.

The recent first advance estimates of the National Statistical Office (NSO) put the real GDP growth for FY 2019-20 at an 11-year low of 5 per cent. The IMF also slashed its growth forecast for India for the current fiscal to 4.8 per cent in its January world economic outlook update. This indicated a complete slowdown in aggregate demand, both private consumption and investment.

The Economic Survey presented in parliament on January 31 also projected a 5 per cent expansion in economic activity in 2019-20. Weak global growth impacting India as well as investment slowdown due to financial sector issues were held responsible by the survey for growth dropping to a decade low in current fiscal.

However, according to the survey, 5 per cent growth projected for the current fiscal is the lowest it could fall, for now. But not many are as upbeat on growth as the government’s chief economic adviser seems to be.

The first two years of any government sees the most reforms undertaken. Since slowing growth has put pressure on government to expedite reforms as five rate cuts by the RBI have not helped revive demand, it was therefore normal to expect some path-breaking announcements in the budget. The government was also expected to loosen its purse strings by deviating from its policy of fiscal consolidation for the first time in six years.

So, while there were many pre-budget expectations from the general public, business leaders and economists, expectations of a panacea for all problems from the FM would have been unfair. But not taking proactive steps to revive growth at a time when the economy needs structural changes is a big negative for the economy.

Finance Minister Nirmala Sitharaman’s maiden budget in July last year was a damp squib. It was given a complete thumbs down by markets which fell steadily afterwards till the FM rolled back some of the July budget proposals, followed by a tax cut for corporate India. Given the many expectations from her second budget, Sitharaman indeed had a tough task to deliver in a tough economic environment.

But has she done enough to steer the economy out of a massive slowdown and revive demand? Not really. The budget didn’t have any specific sops for any sector, as widely expected to create demand in the economy and lift it out of the current slowdown. Considering that there were high expectations from the government, the general response to the budget has been that of disappointment because it makes little or no difference to the massive demand problem.

The stock market is always the first to react to budget proposals. The market expected the FM to deliver a few favourable steps like a tweak in personal income-tax rates, scrapping of long-term capital gains tax (LTCG) and a re-look at the dividend distribution tax (DDT).

While the FM proposed major cuts in personal income tax rates and tweaked exemption structure besides announcing the abolition of DDT (only for corporates, not recipients), the market reacted quite negatively to the budget: it fell sharply by nearly 1,000 point on the Sensex and 300 point on Nifty on Saturday.

Incidentally, this was the biggest fall in headline indices on the budget day in 11 years. Though Nirmala Sitharaman set a new record for the longest Union budget speech in terms of time which left her exhausted, the market wasn’t impressed by the length of her speech.

With no big-bang reforms in the budget, the sell-off was triggered by various factors: no re-look at LTCG and Securities Transaction tax, complicated personal taxes structure with options to either remain in the old regime with exemptions and deductions or opt for the new reduced tax rate without those exemptions and no big spending stimulus for growth revival.

As the budget was perceived to have fallen short of expectations, other factors that disappointed the market were: no significant incentives for infrastructure and real estate and less than expected outlay for rural and agriculture sector. With measures to boost revenue growth being the main challenge for the government in the face of weak economic growth, the budget reflects the constraints of the sluggish economy within which the FM had to operate.

There appears little in the budget that will accelerate growth rate, spur private investment, radically boost consumption or create millions of employment opportunities for youth. This makes significant acceleration in growth in the next fiscal a daunting task.

All budgets are important, but some are more important than others. Since 1990, the budget that changed our lives happened 27 years ago: Manmohan Singh’s game-changing budget of 1991, which opened up the economy by bringing some radical reforms. Commonly known as the ‘epochal budget’, it was presented amid the Indian economic crisis which marked the beginning of economic liberalisation.

The budget of 1997 by P Chidambaram, called the ‘dream budget’, made significant changes to bring down corporate tax and personal income tax. The lower tax rates helped increase compliance and were welcomed by industrialists and common people. Yashwant Sinha’s budget of 2000, called the ‘millennium budget’, was another significant budget which is said to have revolutionised India’s Information Technology sector.

India hasn’t had a good budget in the last decade. Sitharaman had the opportunity to present a budget that could have stood out in an environment of fragile growth and edgy markets. Instead, she chose to play safe by staying on the path of fiscal consolidation.

This has impressed some analysts and rating agencies. But others find her budget match dicey, with a real risk of failing to meet many of the government’s ambitious revenue goals.

The writer is an independent Mumbai-based senior journalist.