In a recent debate in the lower house of the Indian Parliament, Finance Minister Nirmala Sitharaman said the hullabaloo over the alleged inefficacy of the federal budget for fiscal 2020-21 in dealing with the current economic slowdown was not credible. She further argued India was on the right trajectory toward a US$5 trillion economy.
However, the budget tabled on February 1, which mostly delivered the long-term visions of the government, failed to address the immediate needs of the economy. Coming up with reforms, policies or interventions to overcome the downward spiraling of economic indicators should have been the primary motive of the federal budget. In fact, this is what resonates with the masses in the national capital, as the recently conducted Delhi State Assembly elections ratified. The electoral victory of the Aam Aadmi Party (AAP) on February 11 against the Bharatiya Janata Party (BJP) was ensured by focusing on the pressing developmental needs of the state, such as education and health, in the short-run five-year term. In this light, we put forward three major observations on the federal budget.
First, looking at the immediate economic future of the country, the budget does little to rekindle the spirit of consumption and investment in the economy. Yes, there have been some concessions in the form of the slashing of income-tax rates and an expansion of the tax slabs. But if one looks into the nuances of this tax structure, inherent flaws gradually emerge from the backdrop.
The tax reduction will be most effective for those in the lower income-tax brackets. But the tax regime is the same for those above a certain threshold of annual income (above 1.5 million rupees per annum). Before arriving at any conclusion that this is going to drive aggregate demand, one must analyze the purchasing power and aspirations of this group of people. In an environment of high inflation and unemployment, it is very unlikely that they would venture into extravagant spending. Therefore, even the income-tax reductions may not be sufficient in reviving the demand slowdown in the economy alone. It will require several other structural measures.
Second, removing the veneer of attractive themes and poetic verses, the budget appears to be rather hollow and indifferent to immediate needs. It has nonetheless focused on long-term potentials of the economy, which is definitely a novel way of developmental thinking.
Here too there is a caveat. Government policies must be able to sustain the programs that have been proposed in the budget over the long-run horizon. Investment in infrastructure and connectivity as highlighted under the broad theme of “economic development for all” is one such proposal that has the potential of yielding long-term benefits for the economy. The national infrastructure pipeline, aimed at improving “ease of living,” has been sanctioned a sum of 103 trillion rupees ($1.44 billion). If implemented successfully, these projects will have spillover effects not only on employment, but also on the creation of enabling conditions for attracting businesses and investments. But it is for time to tell whether the targeted fiscal deficit of 3.8% will be able to afford such ambitious infrastructure projects in the long run.
Third, despite an increase in total agricultural production, the sector has been under duress over the last few years. Increasing incidences of farmer protests and suicides have put government policies under scrutiny.
Providing a boost to farmers’ income, the budget proposes to expand the PM-KUSUM scheme – which replaced diesel and kerosene with solar energy – by providing an additional 2 million farmers with standalone solar pumps, and aid to another 1.5 million farmers to solarize their pump-sets. Another major limitation of the agriculture value chain in India is the lack of storage facilities along with inherent inefficiencies in the agricultural markets, which impedes market forces from falling into place. This has huge implications for food security as a large section of the vulnerable population is deprived of access to food due to wastage along the “farm to plate” network. The budget does very little to address these issues.
In conclusion, it must be noted that reading the fine print of the budget, Indians must be aware that these provisions are subject to several terms and conditions. The budget, in this sense, is a trade-off between immediate and future needs. Are we ready to wait for that? Is the political structure equipped to carry forward this long-term vision? Depending upon whether answers to these questions are in the affirmative or in the negative, the budget will evoke different feelings. Given the precariousness of the current economic situation, perhaps, the budget is shy of addressing the key issues at hand, which was reflected to a large extent on the recent Delhi polls.
This article was co-authored with Soumya Bhowmick, junior fellow, Observer Research Foundation, Kolkata.