Budget 2020, presented by Finance Minister Nirmala Sitharaman, attempted to set an optimistic tone for reversing the economic slowdown.
It offered something for everyone. However, the Budget had misaligned economic priorities where supply-side was yet again given a push. The approach appeared as an object of appeasement, especially with the tax revenue losses that the government has willingly risked.
Against the backdrop of slowing demand and growth, it was expected that the government will rationalise its expenditure and prioritise key areas of intervention. While the fiscal deficit is managed at 3.8 per cent, a clear account of its actual deficit, including off-budget expenditure, was not presented. There is less credibility in the figure stated, which is to say, that the fiscal situation is a cause of concern.
The first half of the Budget was a move in the right direction. Some of the much-needed reforms included a fiscal impetus to the rural segment. The 16 actionable points to increase farmer income is hoped to bring relief to the distressed rural economy. Additionally, a slew of measures proposing Public-Private Partnership (PPP) models were announced, which is logically consistent, given the fact that the government does not have the fiscal legroom.
What is pertinent to understand is that the history of PPPs in India has not been very successful in practice due to many systemic issues. In order to reach the intent of the initiative, the execution gap and procedural delays riddled in such models have to be tackled so as to generate sustained confidence from the private stakeholders. Favourable reforms in the existing rules and regulations will give a positive signal.
The government’s move on tax reforms, hailed by many, is puzzling since the new rates are applicable if taxpayers forgo all exemptions under Sec 80 C. This is only beneficial to those not claiming any deductions. If anything, this measure has put people in a dilemma on which tax regime to adopt.
This “simplification” and change in tax regime comes at a time when the tax collections have seen a shortfall.
Overall, there has been a greater emphasis laid on investment-led growth where tax incentives have been provided with an objective to bolster India’s start-up environment. The Economic Survey’s suggestion on wealth creation is reflected in these proceedings.
The previous efforts on encouraging investments through corporate tax cuts were misplaced and ill-timed, which led to a further decline in the revenue collection. Budget 2020 is also headed in a similar direction.
Given the current economic environment, a strong case for consumption push while maintaining fiscal prudence was called for. However, the Budget tried to repair areas that were beyond our first concern. It has been done at the cost of India’s fiscal health.
While the fiscal stimulus towards the rural segment is noteworthy, the additional tax cuts and incentives that are given to the corporate sector raise concerns regarding the fiscal health of the government. A host of reforms with limited revenues may prove counter-productive.
This article was published in Money Control on February 1, 2020 click to read
Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research.