In this time of resistance within India, the government has every incentive to appease the people whose patience for ‘Acche Din’ has been wearing thin over the past months. Unfortunately for them, their budget doesn’t deliver on any of these high expectations and could have long term consequences for the country. Currently, we find ourselves in economic turmoil. For the past ten months, all four indicators of the consumer economy – passenger vehicle sales, tractor sales, broadband subscriber base, and air passenger growth – had been below the five-year average trend. Abhijit Banerjee, the Nobel laureate, has even suggested that India is going through an economic recession. Customs duty collections, too, have been hit, falling over 12 percent till November 2019.
The most important question to ask, that is before moving on to how the budget presented by Nirmala Sitharaman chooses to tackle this enormous issue, is how did we get here? Economists agree that the budget presented by Arun Jaitley had seen schemes such as Ujjwala Yojana, direct benefit transfers and Swachh Bharat Mission, and attempted to permeate every aspect of the common man’s life-houses, toilets, electricity, gas cylinders, healthcare. His government presented a picture of an India powered by bullet trains and ‘Make in India’ and ‘Start-Up India’, but the execution has been woefully inadequate. Even their Goods and Services Tax, which was brought in to simplify and unify India’s complicated and disparate tax structure, was rolled out onto a broken infrastructure that wasn’t enough to accommodate this new system. The government’s argument that the businesses hit by the GST were the ones that were evading tax earlier does not quite hold considering tax revenues continue to be on a decline and the economic value that these small businesses are creating in terms of jobs has also been knocked down. The main issue for this government has always been their inability to decide what they want and commit to a practical road map to achieve these goals. This is incredibly clear through their 2020 Budget.
The Budget presented by Sitharaman budgeted a 25 percent increase in net tax collections for 2019-20, but that’s till November, the Centre’s tax revenue had only grown 2.6 percent, the lowest since the 2009 global recession. In order to achieve this ambitious, borderline impossible goal, the government’s net tax collection will have to increase by a massive 119 percent in the final four months of 2019-20 to meet the target. In the first eight months of the fiscal year, the government has achieved 46 percent of its tax target, which is still 12 percent lower than the target. Tax buoyancy (a measure of tax collected per unit of GDP) is expected to fall to 0.6 compared to the budgeted 1.7 as a direct result of the budget proposed. The fiscal deficit, too, will likely rise above 3.3 percent, thereby becoming another missed target. The government has also deferred its elusive 3 percent fiscal deficit target to March 2021. Originally, it had planned to bring the gap down to 3 percent by March 2017.
It’s apparent to economists and common sense voters alike that while the BJP knows where it falls socially, it truly is confused in its approach to the economy. The most primal question has yet to be answered – is India a free market economy or simply a state-run economy? Because while India has tried its best to bring foreign investors into the country in the past five years, we’ve also made some additional barriers to business. For example, India’s decision to stay out of the Regional Comprehensive Economic Partnership (RCEP) was a direct signal to the Asian nations that India isn’t really open for their business or investments anymore. One of the most important things left entirely out of the budget has been imports and exports. On paper, the MEIS is valid until 31 March.
RoDTEP has not been rolled out so far as the cabinet has not approved it even after five months of its announcement. Instead of getting comprehensive, rational policies, the government has aggressively curbed on imports. Curbs on iron and steel have hurt automakers who have often complained of inconsistent quality and the inability to source high-grade steel locally. The message, however, that the Make in India push has sent out is that India is becoming protectionist, which doesn’t help Indian businesses since many build their models around importing components and assembling them in India. Even textiles where India had an edge due to cheap labor, Bangladesh has taken a lead because of their loose labor laws.
The government is yet to deliver on its promise of ‘minimum government and maximum governance’. In fact, one of the big questions standing between India and a $5 trillion economy is whether India has the institutional and governance capacity to be a big economy. At the moment, India’s financial and governance capacity is extremely constricted. It needs an investment rate of 30 percent for its $5 trillion economy goal. According to Abhijit Banerjee, the priority of the government should be on refinancing the banking sector; banking and infrastructure sectors were in need of funding from the government. He even advocated the imposition of more redistribution and a wealth tax. With where the nation seems to be heading, this level of clarity and long-sightedness seems a bit too optimistic, but hopefully, this change comes sooner rather than later.