Union Budget 2020-21: Truth, Perception and Impressions

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.