A Long Budget but Short in Content

The challenge of budget making is to take enough from the 15% of the population (about 200 million or 40 million households) liable for direct taxes without dis-satisfying them too much - these are the ones you mostly see on TV groaning, moaning and wanting more.

And to provide 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 700-750 million population or 150 families. These people have largely been bypassed by the huge growth gains made since 1998. That means the two NDA and two UPA terms.

Indirect taxes involve a bigger population cohort considering that the consumer finally pays the GST. 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 government was very clear. It was to create jobs, and stimulate consumption to kick start the virtuous economic cycle of higher growth, higher savings, higher revenues and higher investments. 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 industrialization 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, power etc. and create the millions of jobs needed each year to absorb the additional 12 million joining the labor force each year.

Since 2014, under the NDA government, the increase in rural wages worked out to 4.7% in nominal terms and a mere 0.5 per cent in real terms after netting out inflation of 4.2%. In comparison, for the same month of the preceding five years (2009 to 2013) when the UPA was in power, nominal rural wages grew by an annual average of about 17.8%. While CPI inflation for agricultural workers, too, averaged 11.1%, the real growth in wages was still higher at 6.7 per cent a year. 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, which 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 the Finance Minister made a passing reference to targeting a nominal GDP growth of 10%. Consider this the nominal GDP growth now is 6.08%. So how do you get an increase of 4% 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%. It means that the regime expects to increase revenues by a little over Rs.3.0 lakh crores. Similarly expenditures are going to increase by similar Rs.3.0 lakh crores.

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 Rs.103 lakh crores for the Infra Pipeline announced by the FM 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, 000crores. This is still too little and too late.

What we were looking to was a grand plan to announce how this huge sum is to be realized? There 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, which India will host next year, but not before she fondly alluded how the PM will now take the top twenty global economies to new heights. Like George Bush II who announced “mission accomplished” after occupying Iraq, Nirmala 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 it 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 are so because of the uncontrolled exploitation of subterranean water resources. Clearly the bigger task is to replenish the underground water resources. The PM had broadly spoken about a national water-harvesting scheme, but there was no allotment for it in this budget.But she did make an exciting announcement.

She however 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. A majority of 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 realized 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 etc. and employment triggers further cycles of investment, consumption and employment. In the past half a dozen 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 PSU’s like Air India, Concor, LIC 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.