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Weak Boosters

Modi government has to turn hope for higher economic growth into reality
The Union budget presented by Finance Minister Nirmala Sitharaman in Parliament on Friday was aimed at boosting investment, though populism gets a fair share of the cake. The strings of measures she announced for increasing foreign and domestic investment might ultimately be effective if they work in a coordinated manner. For instance, India has opened out to global investment hoping to capitalize on the decline of attraction for China as a manufacturing centre in the times of Washington-Beijing trade war. Sitharaman offers a string of incentives to multinationals to set up manufacturing sites for making advanced technological goods such as computer servers, laptops, semi-conductor fabrication, solar photo voltaic cells and solar electric charging infrastructure. The government has announced plans to open up foreign direct investment (FDI) in aviation as also to ease the local sourcing norms for single-brand retail companies and media. The Modi government’s ‘Made in India’ project was also intended to claim a share of the market migrating from China, but it has not been very successful. We will have to wait and see whether the current US-China trade war drives global investments into India with Sitharaman’s new incentives.
For encouraging domestic investment, the governmnet has decided to infuse Rs 70,000 crore for recapitalisation of public sector banks, an amount that is not going to be adequate. The corporate tax for entities with a turnover of upto Rs 400 crore has been reduced from 30 per cent to 25 per cent. Sitharaman’s budget lures domestic investors to the public sector undertakings with a number of measures that include a decision to modify the present policy of retaining 51% stake in PSUs, to continue strategic divestment of select PSUs and set a PSU divestment target of Rs 1.05 lakh crore for the financial year 2019-20. We will have to see how the measures to boost domestic and foreign investment would spur the economy to a growth rate of 8 per cent and create jobs. The Economic Survey 2019-20 had placed great emphasis on kickstarting economic growth which had taken a beating during the last two years. However, proposals in the budget seem more focused on long-term structural changes without any immediate action plan.
Apparently Sitharaman’s budget disappointed the stock market as could be gauged from the sharp fall of Sensex by over 400 points and Nifty by 135 points. Among the measures the stock market was expecting was a much lower corporate tax to boost investment. Sitharaman did not give that and instead she has put 3% surcharge on an income of Rs 2 crore and 7% on Rs 5 crore and above which caused negative impact on high net worth investors. Her announcement that income upto Rs 5 lakh would be exempt from income tax would bring cheers to the middle class. However, the decision to levy Re 2 surcharge on petrol and diesel and costlier gold import would have adverse impact on the disposable income of the middle class.
There are no indications how the government plans to finance the subsidies and other expenditures. According to the budget, the total cost of subsidy on food, fuel and fertilisers is estimated to go up by more than 13 per cent. In 2019-20, this cost is going to be more than Rs 3 lakh crore. The fuel subsidy for diesel and petrol, LPG and kerosene is high. The food subsidy is going to increase from Rs 1.71 lakh crore in 2018-19 to Rs 1.84 crore in 2019-20. There are high costs of entitlements to farmers and small traders. Under the PM Karam Yogi Maan Dhan Scheme the government will extend pension benefits to 3 crore retail traders and shopkeepers whose annual turnover is less than Rs 1.5 crore.
The government has sought to chart out new areas in education and health. Sitharaman emphasized that the government’s focus is on agriculture and farmers and the poor. However, the challenges in development of agriculture are immense. Agriculture is the largest part of the private sector in India. Every farmer is an individual entrepreneur. The budget does not show any radically different way by which farmers can become profit-earning entrepreneurs.

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