This year’s budget speech went on for 2 and half hours. There were many things that the Finance Minister Nirmala Sitaraman touched upon. She spoke about disinvestment, GST collections, doubling farmers income, and many more things. Ideally speaking, the budget speech should be simple. What is the income, how the government plans to spend it, why it thinks its a good way to spend, and what it is doing to increase the income side of the equation, and most importantly, will this plan help expand the economy in any way? I listened to the entire 2 and half hours of the speech. But nonetheless, It was difficult to get the summary of it. Lets try to put FY 2020 budget in four simple buckets.
You see, if you think of economy, the growth comes mainly from four engines. One, Government Expenditure, two, private investment, three, private consumption and finally the fourth, exports. Before we critically look at how this year’s budget adds fuel to each of these growth engines, remember India has been going through an economic slowdown. Almost all the economic indicators suggest that. We are not going deep into that topic. However, having established there is an existing slow down, let’s look at each growth engine more deeply. Let’s talk about the easy one first: Exports.
Exports are the goods and services that India produces and the rest of the world buys from us. Lets say, India produces a pair of tennis shoes at 100 rupees. If it is cheaper for other country to buy than to make it by itself, they will buy it from India. But, remember, it’s not just the cost that decides if India can sell to other countries. I wish it was that simple. However, various other factors play the role. For e.g. the ongoing trade war between the world’s largest economies, the US and China, Brexit, US killing Iraninan military chief all play a role. Frankly speaking, the budget has a limited role to influence how India can successfully export any stuff.
Now the second easy one: Public Expenditure. Public expenditure is the expenditure that the government of India makes. The government can decide to simply print money and put men at work to lay a national highway. But, this will have a serious side effect – Inflation. If the government keeps on spending with newly printed money without producing new goods and services, it will dilute the value of the newly printed rupees. At a point the rupee becomes worthless. So there are limits on how much pubic expenditure can be. The remaining two engines of growth are: the private investment and the private consumption. These are the two areas the government budget can play a significant role and are the most powerful engines of the growth. Let’s look at each one of them. First, private consumption.
Private consumption: this is the money you and I spend to buy stuff. Lets say, If I feel, my cash flow is going to be tight next month, I will become conservative. If enough people feel the same way, then it is a problem. If people do not spend, the shopkeepers in our towns suffer. If shopkeepers do not have money, they will not buy from the wholesalers. If the wholesalers do not buy from the industries, the industries will go bankrupt. You see, this is how the economy works and especially private consumption is so vital to a healthy economy. Alright, let’s look at how the budget helped the private consumption this time around.
Let’s take agriculture as an example first: Agriculture sector in India employs over 50 per cent of India’s population. It contributes over 16 per cent to the GDP. In this budget speech, the Finance minister laid out a 16 point plan to put more money in the farmers’ hand. She allocated a total of 2.83 lakh crore rupees to support farmers. This is 12% higher than 2019 allocation.
Here are some of the ways this money is allocated and how it can help the private consumption. First, on village-level mechanism to store agriculture produce. Second, supply chain logistics, including air-conditioned express freight trains and aircrafts to carry agricultural produce. Third, horticulture production and marketing. Fourth, to double milk processing capacity from 53.5 million MT to 108 million MT by 2025. Fifth, the agriculture credit target for 2020/21 has been set at 15 lakh crore. Sixth, all eligible beneficiaries of the PM-KISAN income support scheme will be covered under the KISAN Credit Card scheme.
So the idea here is that, these efforts will put more money into the farmer’s pocket. Hence it will help them to spend more. So far so good. However, the devil lies in the execution. Most of the these efforts are conditional on states to implement it. However, the BJP is losing state after state assembly elections. For many political reasons, there will be few takers of the strategic push the NDA government is trying to make.
While making her budget speech, Sitaraman announced support for key reforms in the state government domain. We will encourage states which implement the following laws—Model Agricultural Land Leasing Act (2016), Model Agricultural Produce and Livestock Marketing Act (2017), and Model Farming and Services (Promotion and Facilitation) Act, 2018 so on and so forth. You must be seeing where I am going with this. It is almost with certainty the strategic measures announced by the Finance Minister won’t work in reality.
Rather, the government must have focused on putting more money in the farmers hands directly. There are no increases in the allocation for PM Kisan scheme. Surprisingly, there is a 13 percentage point cut in the allocation of MNREGA cuts. MNREGA which stands for Mahatma Gandhi National Rural Employment Guarantee Act. The act aims to enhance livelihood security in rural areas by providing at least 100 days of employment in a financial year. If the government had allocated more money to this program, this would have directly increased spending power of farmers. We can safely conclude, these announcements will not yield any strategic or tactical results. That leaves us with the fourth Engine.
Private Investment. The Finance Ministry proposed an increase in the tariffs on various imports. The hope she had is increased investments in domestic manufacturing. Here is a run down on the increase in import duties.
- Trucks and busses from 25 per cent to 40 per cent;
- auto components (15 per cent to 30 per cent);
- footwear (25 per cent to 35 per cent),
- mobile phone components,fans, water heaters, ovens, insect repellents (10 percent to 20 percent);
- and toys (20 percent to 60 percent).
Its not 100% these will create enough incentive for the local manufactures to invest in new production of goods. They will only invest if they think there will be increased demand from the end consumers. We will have to wait and watch how this move pans out.
Another significant statement made by the Finance minister to increase the private investment is, a creation of investment clearance cell to support the startup owners or entrepreneurs in funding.
“I propose to set up an investment clearance cell that will provide end-to-end facilitation and support including pre-investment advisory, information related to land banks and facilitate clearances at center and also at the state level”.– Finance Minister
Another step the government has taken that can hopefully unlock some stuck money is an initiative like Sabka Vishwas in last year’s budget. The idea is to expedite the settlement of direct cases pending in various appellates. Last year efforts resulted in approximately 1.8 lakh cases and released only a fraction of 9.4 lakh crore rupees stuck in those litigations. A further effort this year may help to unlock some more money.
Another specific effort is Abolishing dividend distribution tax (DDT). DDT is the tax imposed by the Government on Indian companies according to the dividend paid to a company’s investors. The company has to deposit DDT within 14 days of declaration, distribution or payment of dividend whichever is earlier. Getting rid of this DDT could be an Impetus to start-ups. It can an enable an environment for foreign investors and sovereign wealth funds. But we don’t know if this will actually can do any help. We can not be 100% certain the companies will either pay the dividends back to the investors or will they invest the money into new investments.
Having said all this, the immediate reaction from the stock market was a drop of 988 points. It is the steepest fall on a budget day in a decade. Stock markets have this tendency to give a knee jerk reaction to everything. We may not have to take the drop on a serious note. However, a lot depends on how these strategic measures especially in the private consumption and investment play out. Additionally, Sitaraman presented “aspirational india ” theme during her speech. It appeared that the government has no intention to revive the economy with immediate stimulus. The proof lies in cuts in the MNREGA and in the fact there is no increased allocation to PM-KISAN Scheme.