Budget 2020: Hope for the best, prepare for the worst

P Chidambaram
Another year has started, another Budget is round the corner, and another fateful year for the Indian economy.

Since 2016-17, every year has brought surprises and tears. 2016-17 was the year of the catastrophic demonetisation. 2017-18 was the year of the flawed GST and its hurried implementation. 2018-19 was the year when the slide began and the growth rate dipped in every quarter (8.0, 7.0. 6.6 and 5.8 per cent). 2019-20 was the wasted year when the government refused to heed warnings and allowed the growth rate to collapse to below 5 per cent.

Extent of Collapse

It is now pretty clear that

* 2019-20, when the final revisions are made, will record a growth rate of less than 5 per cent;

* that the government’s revenues will fall significantly short of the BE (Budget Estimates) under both major heads (net tax revenue and disinvestment);

* that the fiscal deficit will breach the BE target of 3.3 per cent and will be close to 3.8 to 4.0 per cent;

* that both imports and exports of merchandise will record negative growth over the previous year;

* that private sector investment (measured by Gross Fixed Capital Formation), in current prices, will be about Rs 57,42,431 crore (or 28.1 per cent of the GDP), indicating investor risk-aversion and weariness;

* that private consumption remained sluggish throughout the year;

* that the agriculture sector remained under acute stress and will return a growth rate of about 2 per cent;

* that the job-creating sectors like manufacturing, mining and construction shed jobs in 2019-20, leading to a reduction in total employment;

* that credit growth to industry as a whole, and to the SME sector in particular, will be negative over the previous year; and

* that year-end CPI-based inflation will be over 7 per cent (with food inflation at over 10 per cent), adding to the distress caused by rising unemployment and stagnant wages/incomes.

According to Dr Arvind Subramanian, former chief economic adviser, the economy is in the ‘intensive care unit’. According to Nobel Prize winner Dr Abhijit Banerjee, the economy is ‘doing badly’. None of the observations of critics seems to have worried the government, that maintains that the upturn will happen in the ‘next quarter’! Because of its ostrich-like attitude, the government has rejected every correct remedial measure and has, instead, taken the wrong measures. For example, if taxes had to be cut, the government should have cut indirect taxes; instead it gave a bonanza amounting to

Rs 1,45,000 crore to the corporate sector and got nothing in return in terms of higher investment. The government should have boosted demand by putting more money in the hands of the poor; instead it cut back on the outlays (BE) for MGNREGA, Swachh Bharat, White Revolution and Pradhan Mantri Awas Yojana and may actually spend even less.

PM’s budget: What will he do?

When the Prime Minister met with 12 top businesspersons (without Ms Nirmala Sitharaman or aides), it showed nervousness as well as lack of confidence in the Finance Minister. According to sketchy reports in the media and hints dropped by some of the participants, the following are possible in the Budget that will be presented on February 1, 2020:

1. A cut in the income tax rates for individuals earning up to Rs 10 lakh a year.

2. Abolition or reduction of the tax on Long Term Capital Gains realised after holding the security for two years.

3. Reduction of the rate of Dividend Distribution Tax.

4. A promise to introduce the Direct Taxes Code.

5. Selective, short-term reduction of GST for a few sectors like construction.

6. Increase in the PM-KISAN amount from the current level of Rs 6,000 per year and/or extension of the scheme to more categories of beneficiaries.

7. Large increases in the outlays for defence; MGNREGA; SC, ST, OBC and minority scholarships; Ayushman Bharat (health insurance) etc by over-estimating tax revenues or borrowing heavily.

8. Setting up of one or two Developmental Finance Institutions (DFIs) for providing long-term finance to industry in general and SMEs in particular.

9. A massive disinvestment programme and/or asset monetisation programme with the narrow objective of raising resources.

Economy a Drag

All of the above is in line with the thinking of the government that relies heavily on the corporate sector (for funds), on the middle class (for votes) and on the defence of India (for distraction). Its capacity to think of structural reforms is limited. It has no confidence that the banking system will provide credit. Thanks to its protectionist lobby, it has given up on foreign trade as an engine of growth. It does not wish to curtail the exuberance of the stock markets. It cannot define its relationship with the RBI and determine how the two can maintain financial stability, promote growth and contain inflation.

The economy is not the main concern of the BJP government; it is the Hindutva agenda. On the other hand, the people are concerned with issues tied to economic growth such as more jobs, better producer prices, wages and incomes, relative price stability, access to better education and health care, and improved infrastructure.

It is painfully clear that the people have got a government that has turned the Indian economy into a “drag on the world economy”. That is the damning verdict of the IMF.