Insights into Editorial: The macro does not gel with the micro
The India Budget 2019 describes with admirable practicality what we would like to see in India, but it is not convincing on how we can have the growth to afford the same.
The budget was nevertheless marked by an even-handedness and attention to detail that is rare.
The first was seen in the methodical way in which Finance minister ranged over the areas — manufacturing, Gramin India, Shahari India, women, and the youth.
One of the many instances in which the second was evident is in the elaboration of the proposed elimination of human interface in the conduct of scrutiny for taxpayers.
Wide variety of issues in Budget speech:
The economy grew by just 5.8% in real terms in the last quarter of 2018-19. Yet, the Union Budget for 2019-20 assumes that the economy will grow this year by 12% in nominal terms, or by 7-8% in real terms.
There was a disconnect in the speech. At the outset, Ms. Sitharaman appeared to assert that India is headed towards becoming a $5 trillion economy by 2024.
However, much of the rest of her speech was concerned with what this economy would look like that there would be widely dispersed social and physical infrastructure; a low-carbon footprint; and housing for all, among other desirable things.
There are neither any incentives for private investment nor support for public investment. To make matters worse, the Budget has actually projected a decline in central government capital expenditure (public investment) in 2019-20 by 6% in nominal terms.
A major source of revenue mobilisation is to come from a higher cess and special additional excise duty on petrol/diesel. That is good for the Centre because cesses are not to be shared with the States
Budget 2019 mentioned 5 Themes:
There can be notice of five points in the Budget are to be highlighted:
- Bank capitalisation and tax-related changes.
- rural electrification to be completed by 2022;
- a final push for water and sanitation,
- making India open defecation free by October 2 this year;
- encouraging solar power usage;
- Of these, electrification, water and solar power may not require large outlays but they make a big difference to people’s lives, which portrays its actions in these areas as aimed at improving ‘the ease of living’.
- The infusion of ₹70,000 crore into public sector banks would be a significant contribution to easing the liquidity situation caused by non-performing assets.
- It is mentioned that this will be accompanied by governance reforms, though we do not know as yet what form they will take, which alone will determine how significant they will be.
- The package for the financial sector also includes a time-bound public guarantee to commercial banks that acquire assets of the presently troubled Non-Banking Financial Companies (NBFCs).
- This should bring some stability to the NBFC sector, instability in which would ruin the lives of hundreds of investors and choke lines of credit outside the banking sector.
- The proposals on taxation include changes in both tax liability and administration.
- The exemption limit on the income tax has been raised but the surcharge has now been increased on those in the highest two tax brackets.
- There is a balancing act here. Similarly, the upper limit for eligibility for the lowest slab of the corporate tax has been raised from ₹250 crore to ₹400 crore.
- This in in line with the demands of India’s corporate sector but it may not be what is best for the economy at a time when the government needs as much revenue as it can garner to quicken it.
New era of tax administration:
The Budget may have initiated a new era with respect to the tax administration.
Compliance is to be made easier for the taxpayer. There are to be pre-filled tax returns and less human interaction in the event of tax scrutiny.
There will be ‘faceless assessment’ through the use of an electronic mode.
Face-to-face encounters between inspectors and the assesses will be eliminated, with notices sent from a central Income Tax cell.
Some similar simplification is to be done in the sphere of the Goods and Services Tax too. The Minister is right to speak of all this as a “paradigm shift” in the functioning of the tax department.
While it is surprising that the Finance Minister equated the ease of paying taxes with the ease of living in India, which must take far more into account, it is the case that individuals have experienced powerlessness when dealing with the tax department.
Critical View: Where the Budget fails:
There is no mention in the Budget of public investment, stepping up of which would be essential even to stimulate private investment right now. Capital expenditure has been raised by much less than the actual increase in the past year.
This Budget’s failing is in not setting out the means by which the government is to take the economy to the aspirational $5 trillion level.
Barring unforeseen productivity surges, we must assume that investment holds the key. The Budget has nothing to say on the matter.
At least the Economic Survey tabled earlier spoke of the importance of investment, even though it somewhat ideologically confined validity to private investment.
Perhaps it is believed that the very return of this government is sufficient to release the ‘animal spirits’ of private investors.
However, this would amount to overlooking the history since 2014. In this period, though there has been macroeconomic stability and much attention has been paid to the ease of doing business, private investment has declined.
This points to the limits to confining yourself to the supply side when you are interested in growth, which this government is doing.
Moving to a $5 trillion economy by 2024 would require growing at a rate faster than the average that has been achieved since 2014.
One way of seeing this Budget is that it is something good in parts. It describes with admirable practicality what we would like to see in India, from water connections to roads.
But it is not convincing on how we can have the growth to afford them. We might say then that the macroeconomics does not gel with the microeconomics.