Union Budget, 2019-20
By Dr. R.K.Nimai
People were expecting the Union Budget for 2019-20 with anticipation as it is the budget being presented by a trained economist, a women finance minister and the first budget of NDA 3, which was returned with a thumping majority, but it belied the expectation. There is hardly any new initiative and the Jaitley years seem to have cast a long shadow.
The emphasis seem more on the idea of achieving a $5 trillion economy by 2024, but that also was more on rhetoric, rather than on substance. Any economy which grows at 8 %, with an inflation rate of 4% shall double its nominal GDP in six years. Thus the emphasis should be in maintaining a controlled growth of not less than 8%, while managing the inflation at 4%. NDA2 had managed inflation and it is expected that it will continue to do so. However, there are issues beyond its control like a poor monsoon, rising crude prices, global trade war between major players, etc which can fuel high inflation. There is no denying the fact that there is a slowdown in the economy of the country during the last quarter and there is a need to propel the economy through bold initiatives.
Analyst believe that to arrest the downward slide of growth it need stimulus like more public spending to boost growth and arrest domestic slowdown, make transparent the fiscal deficit figures by incorporating off-budget borrowings, and initiate a major reform to re-kick start the economy. The Budget does not include any fiscal stimulus and also continue to hide the off budget liabilities. There is no change in industrial and labour sector though efforts have been made to change the environment of the capital market. It is clear that it would not have been feasible to satisfy all the need but the prioritisation is what matters. As in the states, the Union budget is more towards meeting the revenue expenditure while the capital expenditure is pegged. This is a major constraint in budgeting in India, as major chunk of revenue expenditure is towards meeting salary and interest liabilities and as there is no hiring and firing system, once a person is appointed he becomes part of the revenue expenditure till he retires. To be fair, certain portion of the revenue provision will be spent on work of capital nature such as grants to the states and the provisions for CSS which are budgeted as revenue expenditure but some portion will be spent on works of capital nature.
Experts demand inclusion of off budget liabilities to bring out a clear cut financial position of the country. Without it, the fiscal deficit shown in the budget is artificial though it shows a healthy fiscal deficit of 3.4%. If all the off budget liabilities are included the fiscal deficit may rise to about 5%, indicating the huge liabilities on this count. As data on this aspect is not available, the real fiscal deficit cannot be determined with certainty, which makes financial management of the country all the more difficult besides not attracting investment. The non inclusion of recapitalisation bonds is one such example, as only the interest liability is budgeted. There is a tendency in both the states and the centre to suppress the expenditure while over assessing the receipts at the time of preparation of any budget, which was corrected at the time of the revised estimates. This is bad budget preparation and was solely aimed at giving a rosy picture of the financial health. Further, there is a controversy on the estimated receipts, which used a higher figure than what was predicted in the Economic Survey, which had never happened in the past.
The spending pattern broadly remains the same. There was at first glance brouhaha over the increased provision under Agriculture sector but in reality the increase is mainly to meet the transfer of Rs 6,000/- to each farmer. The estimated expenditure for the different sector continues to be similar as in NDA2, with Interest Payments getting the largest share; an unavoidable expenditure, followed by Transfer to States, another unavoidable, Defence and CSS. It may not be inappropriate to mention that for many years, the centre is slowly but steadily encroaching on the powers of the States, resulting in a biased Centre-State relationship. There is still a tendency in almost all the CSS following “a one size fit all” approach. India is a vast country with differences not only among the states but even within the states and districts. Thus without local adjustment, CSS will not be able to achieve the targets. With most of the states having financial difficulties and had to depend on the CSS funds for development, “The Say of the Centre” will increase in developmental activities including prioritisation. This will impact on the federal structure of the country and erode the responsibility of the states, which may haunt the country in the future. In 2019-20, Agriculture, Labour and New & renewable Energy are major gainers while Planning, Heavy Industries and Panchayati Raj were the main losers.
For re-kick starting the sluggish economy, there is an urgent need for public spending on infrastructure. Even though the speech says that Rs 100 lakh crore will be spent on infrastructure in the next five years, this is not seen in the budget. Such major investment will definitely propel the economy but it is more for the ears than real. The rebate in the corporate tax will provide some funds for investment for those companies benefitted by it. Besides, the increased cess on petrol and diesel will increase the Central Road Fund provision, thereby making available more funds for road construction. However, the tendency to rename existing schemes and adding the provision as fresh initiative is a zero sum game. Major investment must be for the good of the people and should not be like that in China where beautiful cities are now ghost town without takers and the debt is more that 270% of the GDP. In other words, the investment should be for the people and not investment for its sake; it should be a medium for development and not an end in itself.
No one expected a major benefit for the middle class as the existing income tax rates for this category was considered reasonable and as anticipated there was no change in the income tax rates, except for the filthy rich. The increase in the income tax for the very high income group may discourage investment. The imposition of 2% tax, on those who withdraw Rs 2.00 crore and above in cash in a financial year, is an effort to curb cash transaction and support digital payment but it will be cosmetic with limited benefit. Habits die hard, and despite the best efforts of the Government, Japan still continues to rely heavily on cash. Even when such a developed country is inching very slowly in the use of digital payments, the effort to leapfrog towards what is called “cashless society” will not bear fruit as people in the country will find out ways to circumvent it. The need is to make aware the people about the ease of using digital payment, which most of the population is not bothered as their transactions are so low that it is simpler to conduct in cash.
The proposed reduction on GST from 18% to 5% on e-vehicles is however, a step in the right direction and should have been brought in much earlier. In fact, oil guzzlers must be taxed heavily while clean fuel motorised vehicles must be given tax relaxation. There is a need to encourage bicycles as it is the most cost effective mode of transport and the states must also prioritise this segment by providing bicycle lanes and the Union government can provide funds for creating bicycle lanes in the cities.
NDA2 regime was lucky in the sense that the price of crude was within manageable limit which used to haunt UPA regime. However, there are still certain intangibles which may impact the economy such as the trade war between USA and China, terminating of India as a beneficiary nation under the Generalised System of Preferences by USA and India’s counter response, Trump’s attack on WTO’s Most Favoured Nation regime, erratic monsoon, etc.
It is heartening to learn that the FM called on Dr. Manmohon Singh before the presentation of the Budget as this is a bold step in consulting an opposition leader. Despite everything, the latter is a patriot, who is personally clean and very knowledgeable about the economy of the country. Meeting him can only bring in good and the FM deserves congratulation for such an inclusive approach in preparing the budget.
To conclude, there is little one can say on the Union budget 2019-20 except that there is no major departure from the NDA2 in its approach and is status quoist in nature with the approach of NDA2 hanging heavily. Preparing a budget which can satisfy all stakeholders is a dream and can’t be seen in reality. However, the urgent need to provide stimulus for growth was not found so the economy may remain sluggish for some time.
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