The challenge of budget making is to take enough from the 15% of the population liable for direct taxes (about 200 million) without dissatisfying them too much – these are the ones you mostly see on TV groaning, moaning and wanting more. The budget framers also have the challenge of providing enough to blunt the edge of popular anger of the 60% who make little more than subsistence in terms of income, given their property and trade-able skills. This covers about 700 million-750 million people. These people have largely been bypassed by the huge growth gains made since 1998.
Indirect taxes involve a bigger population cohort, considering that every consumer finally pays the Goods and Services Tax. Thus, even a matchbox results in tax revenues. The GST course has been set and mercifully the Finance Ministry does not have too much discretion in terms of tinkering to favor some and punish others.
The challenge for the Modi government was very clear. It was to create jobs, and stimulate consumption to kickstart the virtuous economic cycle of higher growth, higher savings, higher revenues and higher investment. The most significant cause for the decline of growth has been the decline in capital investment. It was 39.8% of GDP in 2010 and is now a good 11% lower. Clearly without an increase of capital investment, one cannot hope for more industrialisation and hence higher growth.
The immediate task therefore is obvious. The government needs to step up investment in infrastructure to create demand for the core sector like cement, steel, building materials and power and create the millions of jobs needed each year to absorb the additional 12 million Indians joining the labor force each year.
Since 2014, under the Bharatiya Janata Party-led National Democratic Alliance government, the increase in rural wages worked out to 4.7% in nominal terms and a mere 0.5% in real terms after netting out inflation of 4.2%. In comparison, for the same month of the preceding five years (2009-2013) when the Congress-led United Progressive Alliance was in power, nominal rural wages grew by an annual average of about 17.8%.
Now, wage increase has frozen due to oversupply brought up by low job creation. Job creation is at a 45-year low. That is the essential problem that besets a youthful country, in which almost 65% of the population is below the age of 30. So quite clearly we needed a plan to kick off growth again.
At the tail end of her inordinately long speech, Finance Minister Nirmala Sitharaman made a passing reference to targeting a nominal GDP growth of 10%. Consider that the nominal GDP growth now is 6.08%. How do you get an increase of 4 percentage point in nominal GDP growth? Clearly it calls for a far greater input by way of capital expenditure.
A budget is about the ways and means to achieve larger economic goals. The 2020-’21 Budget envisages Rs 22.99 lakh crores of revenue receipts, Rs 30.42 lakh crores as expenditure, leaving it with a fiscal deficit of 3.8%.
At the same time, the Finance Minister expects capital expenditure to increase by 21%. The central capital expenditure in 2019-’20 was Rs 3.36 lakh crores. Thus, we can infer that this year the capital expenditure will increase by about Rs.60, 000 crores. Now relate this to the R.103 lakh crores for the Infra Pipeline announced by the finance minister late last year. Of this, schemes amounting to about Rs 23 lakh crores were announced. But for this the new budget provides a meager Rs 22, 000 crores. This is still too little and too late. We were looking for a grand plan to announce how this huge sum is to be realised but tThere was not a word about it in her 2 hours 40 minutes long speech.
The speech was replete with minute details like Rs 100 crores for the G-20 conference that India will host next year, but not before Sitharaman fondly mentioned how Prime Minister Narendra Modi will now take the top 20 global economies to new heights. Like George Bush II who announced “mission accomplished” after occupying Iraq, Sitharaman proclaimed Swachch Bharat was a total success, while every street corner and open maidan in the country tells us another story. So she announced just Rs.12, 000 crores for the programme this year.
Elsewhere, she announced special schemes for 100-water stressed districts, while announcing 20 lakh solar pumps. The irony should not be missed here. Most of the water-stressed districts have reached this situation because of the uncontrolled exploitation of subterranean water resources. Clearly the bigger task is to replenish the underground water resources. The prime minister had broadly spoken about a national water-harvesting scheme, but there was no allotment for it in this budget.
But Sitharaman did make an exciting announcement. She said that the government had promised to provide piped water to all households in the country entailing an expenditure of Rs.3.36 lakh crores. This was a rare instance when the government offering to puts its money where its mouth was.
Added to this the government has to promise delivering all this with a most expensive public administration (11.4% of GDP), and an almost-defunct delivery system. Government employees – over 25 million –- are the bedrock of the direct taxes paying cohort. So in effect a good part of the direct taxes that are realised by the government are from those who are paid by it.
We have more problems now. The biggest driver of economic growth is the state’s capital expenditure, which by its consumption of core industrial material like cement, steel and the like and employment triggers further cycles of investment, consumption and employment. Over the past six years we have seen a noticeable drop in investment, public and private. With government coffers low and shrinking, where is the money to lead expansion going to come from? This, to my mind, is Modi’s biggest challenge.
It can come from more taxation or by selling off more chunks of the generally unproductive public sector or by borrowing. To this extent, the Finance Minister named some public sector units like Air India, Concor and the Life Insurance Corporation from which the government plans to fully or partly exit. People will make arguments against all, but the government now needs to do all of them in ample measure. It needs money to invest, which in turn will drive private investment.
It’s a tough act. To compound it, growth buoyancy is determined largely by an optimistic national mood. Only that will get up growth and hence government revenues.
To sum up: this budget lacks any big ideas. It does not seriously attempt to reverse the slide, apparently leaving it to the hidden hand, something that the government’s Chief Economic Advisor seems to have discovered. The world has moved on since Adam Smith.