Budget 2020-21 apparently
has belied many expectations. Given the projected arc of the economy, anticipation
abounded on the prospective display of economic fireworks infusing animal
spirits in the economy. To a few experts, there was a 2/3 probability of few
major reforms being announced. The
seemingly abrupt end of a marathon speech thanks to Nirmala Sitaraman retiring
hurt, left many apparently wondering about the objective of the marathon. Given
its inability to go in for radical structural reforms, perhaps, there was very
little to discern rather than entering Guinness Book of Records for the longest budget speech in history.
She had all the opportunity
in the world to go in for some massive announcements. There are no major
elections on the anvil. The FDI is at record levels. Political omerta codes are
undergoing creative destruction. There are signs of economics Schumpeterianism on
the skyline. Global headwinds are causing turbulences in economic growth. There
was no better raison d’etre to set in motion a visible structural shifts rather
than pieces of incrementalism.
At the outset,
given the economic growth troubles, the government has to build in an element
of trust with the populace in respect to its handling of the economy. Therefore,
a finance minister who inspires trust among different constituents is a sine qua
non. Finance Minister must inspire confidence among the investors and firms
over her ability to address their concerns. There must of course be handled
without trading off on the fiscal front where the government record has pretty robust
in managing the fiscal deficit. Prima facie, Nirmala Sitaraman cannot seem to
fit in to finance ministry in terms of building investor and business
confidence. She is neither a political heavyweight nor an economic or business
heavyweight. Arun Jaitley could run things through like GST thanks to his
superb networking skills across parties coupled with his political heft within
the party and the backing of the Prime Minister. Nirmala doesn’t seem to
command those and her articulation skills too are found wanting. Unlike Piyush
Goyal, who through his raising of IT exemption could turn the budget headlines
in the way he desired, Nirmala cannot turn the headlines onto a positive spin. Therefore,
in absence of any dramatic headlines, the budget speech turns out to be
lacklustre. As they say, finer prints are best left unread even in the best of
the times.
So it is
pertinent to decode what undid the budget. The marathon speech itself puts half
of them onto sleep. Most of Part A of the speech in the normal course is about
intent and on fund allocation. They meander into many an aspect but ground
impact might turn out to be different. FM wants the states to implement model
laws enacted on agriculture and allied areas in absence of clarity on what
would incentivise states to implement the same, it merely remains a statement
on paper. Political persuasion is a critical in this aspect, yet the FM is
found wanting in the same. Allocations to agriculture, welfare of SC/STs, OBCs etc.
often are routed through states and centre does not have much say except for
fund transfer. She could have gone a mile further and implement direct benefit transfer
to beneficiary of every scheme that necessitates funding from the centre. Her
reiteration of Sindhu-Saraswati civilization might endear her to the right, however
hardly a budgetary matter. In contrast, it might be a useful tools for the
critics to go hammer and tong at the budget. If in fact cultural tourism was
the objective, what prevented from announcing long tax holidays for firms
engaged in heritage tourism, museums etc.
The significance
of the budget lies in the signals it seeks to convey to the investor community,
business community and the common population. The signals emerge from Part B
wherein tax proposals are discussed. This is where the budget was found
wanting. There was a welcome step of abolishing dividend distribution tax which
will lead to greater liquidity levels in the hands of the corporates. Yet, it
being taxed at hands of the recipient without any corresponding reduction in
tax rates is a dampener. On direct taxes front, it was logical to extend low
tax rates to individual the trade-off being foregoing exemptions. Yet the slabs
being constructed add to the complexity of the structure. While, it seems
exemptions will be phased out, there is no clarity on the sunset period. Simple
2-3 tax slabs without exemptions while allowing tax payers to opt for
continuance in the existing regime might have made sense. Even more sensible would
have been announcement let us say 2028-29 from which wherein all exemptions
would be removed. So anyone taking housing loan for instance would know the
duration of tax benefits while someone with ongoing housing loan might plan to
engage in prepayment before the sunset clause comes in the effect.
Tax charter is
statement of intent yet irrelevant in practice. It is common sense to
understand the ordinary tax payer has hardly any practical recourse for
violation of tax charter. For another section, it might be a tool of extortion
from their Assessing Officers.
One good step
has been the abolition of audit requirements for MSMEs upto annual turnover of
Rs. 5 crores. This however becomes a sideshow in an act dominated by other
concerns. Changes in tax policies towards NRIs (Residential limit, tie-breaker
rules etc) will be unpopular though essentially steps in the right direction. There
are of course some positive steps in building the corporate bond market whose
effects perhaps will be felt later.
There is some
signal towards promoting completion is power DISCOM yet unclear how states will
implement the same. Approval in infrastructure projects are good yet very
little seems to be done to improve to ecosystem that facilitate infrastructure
projects in the first place. Rather than announcements or fund allocation,
there are enough regulatory barriers of entry which hinder the entry in the
first place. These barriers remain in place without the removal of which other
things might just end up being noise.
Barring an intent to list LIC, there was hardly indication on
disinvestment. There was very little talk of dismantling regulatory barriers
etc. Social sector spending often is a mirage.
The budget might
have micro positives yet communication is the biggest barrier. The intent could
have been communicated in less than an hour focusing on few macro headline
announcements. Sentiments need to pick up and the budget hardly does anything
on this front. The stock market reaction is sufficient indicator of the
investor mood in the short run.
There is no
doubt, fiscal consolidation is of utmost importance and Modi government doesn’t
want to let go of the advantage. It wants to hold stick to fiscal prudence
irrespective of the constraints. Therefore, the compromise on the revenue front
necessitates of continuation of high taxes. Perchance, the ministry officials
have calculated tax elasticity of demand to be relatively inelastic, lower tax
regimes will not sufficiently compensate the loss of tax revenues by increasing
the volume of tax payers, but it is mere conjecture. Laffer curve does hold and
therefore the logic for lower taxes.
The bottom line
is sentiments matter, communication matters and more importantly trust matters.
The FM being a political lightweight and neither has a heft in the economic
circuit is found wanting in all three aspects. The animal spirits to be
rekindled needs a strong push through signals which is missing. The press
conferences are more damage control mechanism rather than forum for pushing
critical announcements with quick diminishing returns. The sooner the government
realizes, the better it is. Opportunities might knock once, it was just an
opportunity let go waste. A full toss was played as forward defensive stroke.
Just that is better compared to July 2019 or Feb 2012 is no solace.
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