Union budget: An opportunity lost to boost economic growth
Economic growth has slumped to its lowest level in decades. Investment as a proportion of gross domestic product (GDP) has declined steadily. Investor confidence has been battered. Industrial production has witnessed a contraction, so visible in automobiles and fast-moving consumer goods. The crisis in agriculture runs deep. Rural India, home to two-thirds of our population, has witnessed a stagnation or decline in consumption and incomes. Unemployment is at an all-time high.
There was a crying need for the government to act here and now. Yet, the budget for 2020-21 was clearly not one that should have been presented by a government elected with a decisive political mandate just eight months ago. Instead of being confident, it was hesitant and diffident, possibly because of a misguided fiscal conservatism.
The budget speech, at 160 minutes, was long on words but short on substance. The abundant political rhetoric was framed around three themes: an aspirational India, economic development and a caring society. However, people will judge this budget in terms of outcomes, rather than intentions, which affect their daily lives.
Governments always, and everywhere, fudge figures to claim fiscal virtue. But the arithmetic of the budget is particularly suspect. It overestimates revenues and underestimates expenditures.
In 2020-21, nominal GDP growth is projected at 10%. Yet, revenues are estimated to rise by 14% for income tax and 12% for corporation tax. GST revenues, where both implementation and compliance leave much to be desired, are estimated to rise by 13%, compared with a revenue shortfall of 8% in 2019-20.
The illusory cushion implicit in disinvestment receipts estimated at ₹2.1 trillion, compared with revised estimates of ₹0.65 trillion in 2019-20 although only ₹0.2 trillion has been realized so far, is even greater. Of this, ₹0.9 trillion is to come mostly from Life Insurance Corporation (LIC), while ₹1.2 trillion is to come from other public sector firms, largely from Air India. Given the political complexity of asset sales by government, where price discovery is so elusive and due diligence so time-consuming, this expectation represents a triumph of hope over experience.
The provisions for expenditure on subsidies and establishment are, as usual, inadequate. Despite the tall claims, as a proportion of total government expenditure, the allocations for education at 3.3%, health at 2.2%, rural development at 4.8%, and social welfare at 1.7%, are all lower than in 2019-20.
The fundamental problem with the budget is that it does little, if anything, to address the slowdown in the economy. The emphasis on infrastructure is both necessary and desirable. But supply-side responses can drive output growth at best in the medium term. In the short-run, stimulating domestic demand is the only means of reviving economic growth. In any economy, there are four sources of demand: investment, exports, government consumption expenditure, and private consumption expenditure.
The budget could have pushed up public investment. But capital expenditure as a proportion of total expenditure is 13.5%, compared with 12.9% in 2019-20. The milieu is simply not conducive to stimulating private investment as interest rates remain high, while the financial sector is unable or unwilling to lend, and intimidation by tax authorities or enforcement agencies has sharply eroded investor confidence.
Exports have stagnated in the range of $300 billion for the past six years, while the share of exports in GDP has dropped from 17% to 12%. Yet, the budget neglects exports altogether.
The budget was the only means of stepping up government consumption expenditure. Alas, revenue expenditure as a proportion of total expenditure remains almost unchanged at 11.7% compared with 11.5% in 2019-20.
In an economic slowdown, when income growth is subdued, private consumption expenditure can rise only if there is an increase in the disposable income of households. But nothing was done for the rural poor or small farmers. The allocation for the rural job guarantee scheme is ₹0.61 trillion, 9% less than ₹0.71 trillion 2019-20, while the allocation for PM Kisan is ₹0.75 trillion, the same as 2019-20 (though disbursement was only ₹0.55 trillion). For the urban middle class, with incomes less than ₹15 lakh, tax rates have been reduced but only if they give up exemptions and deductions. Six rates and six slabs, in place of three, complicate the structure, while the tax relief will be marginal.
It seems that macroeconomic understanding in the government is clouded by a misguided deficit fetishism. And if that was indeed the concern, why did the government slash corporation tax rates last year, which meant that the estimated revenue forgone enlarged the fiscal deficit by 0.75% of GDP?
In an economic downturn, counter-cyclical policies that increased government expenditure were the only means of reviving economic growth in the short run. That would have led to buoyancy in government revenues, reducing the fiscal deficit compared with what it would otherwise be. However, in the absence of a stimulus, a persistent slowdown would mean continuing revenue shortfalls that would only enlarge the fiscal deficit further. Thus, if the budget had stepped up government expenditure, ironically enough, it would also have helped the objective of fiscal consolidation, creating a win-win situation. This opportunity was lost because of flawed thinking.
Deepak Nayyar is emeritus professor of economics, Jawaharlal Nehru University
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