Budget: Reforms Gone With The Wind



By definition, Vote on Account or the interim budget as it is also referred to, is a truncated budget; a vote in the form of consent from the Parliament to spend for the 3 or 4 months of the next fiscal year. The arrangement is temporary because the new government will be in place within a short period. Logically and perhaps morally too, the full fledged budget for FY2020 ought to be the prerogative of the new government. Unfortunately, this is not so even by going by convention. Hence, as was widely expected, the NDA government has presented not just a full year’s budget but also a sort of a plan for the next decade!

Given the reality of electoral losses and reverses faced by the government, there was no doubt that the interim budget would mainly address two constituents – farmers and the urban middle class. The thrust of the budget is indeed on these two segments. But it is highly doubtful if the pain points have received due attention. Instead of attempting serious policy initiatives, what are proposed are only in the nature of short-term fixes. Take for example the farmers for whom ostensibly a huge income support programme has been announced. Who are the beneficiaries? Farmers who own less than 2 hectares of land. This will mean a large chunk of farmers are included since the land holdings in the country have got fragmented due to laws of inheritance and excessive dependence on land for livelihood. And 2 hectares is an arbitrary limit in a country with such large diversity as India. Even a smaller irrigated land holding can generate sizeable income with intensive farming using modern techniques and producing value-added produce.

Land owning agriculturists are a relatively well-off segment in the rural economy. The income support is pegged at Rs 6,000 per farmer which will be in the form of direct cash transfer to the bank account of the beneficiary. It will be paid in three equal installments; the first one to be credited in this financial year itself. A provision of Rs 20,000 crore has been made for the current fiscal and the income support scheme would cost Rs 75,000 crore for the full year FY2020. The government claims that the scheme would benefit 12 crore farmers. What about the landless labourers, marginalised workers and rural artisans? They do not seem to benefit from the give-away announced by the government. In fact, they deserve the ‘support’ more than anyone else. The scheme is more on Telengana model rather than the Odisha one; the latter is considered better in terms of giving relief to distressed farmer.

More than the farmer, the biggest beneficiary of this budget seems to be the urban middle and the relatively affluent class. Doubling the income tax exemption limit from Rs 2.5 lakh to Rs 5 lakh is, without doubt, a bold step. However, there is no change in the tax rates which means incomes above Rs 5 lakh up to Rs 10 lakh will be taxed at 20% and above that will attract tax of 30% plus cess. It will certainly please the salaried and one of the most vocal class of our society. Some would say it was long overdue, what with inflation reducing the real incomes over a long period of time. The Direct Tax Code (DTC) has also recommended substantial hike in the exemption limit of income tax. But that is along with other measures such as removal of all other incentives, concessions in the income tax.

What the Finance Minister has done is while he has raised the exemption limit, various other distorting concessions and incentives continue. In fact, Standard Deduction has been hiked from Rs 40,000 to Rs 50,000. This is a retrograde step viewed from the angle of fiscal reforms. Even a fifty thousand hike in threshold limit would have put a large number of taxpayers outside the tax net; now a sudden and steep hike of Rs 2.5 lakh will mean millions will go out of the tax net. The number of income tax assesses is 6.85 crore out of a total population of around 140 crores! According to the FM this will mean loss in revenue to the tune of Rs 18,500 crore; actually it could turn out to be more if one takes into account growing incomes. This is negating a painstaking reform effort of several years to expand the tax net. It will take several years more in future to bring them back into the tax-paying fold. Further, this will also mean a greater reliance on indirect taxes that are seen more as a tax on the poor rather than on the rich.

With GST, some of the powers of the FM and the government have been taken over by the GST Council. Hence, the usual tinkering of rates such as on customs and excise are not to be seen now. Instead, the FM claimed that he would recommend to the GST Council to lower rates on certain categories such as housing. Some rationalisation measures have been proposed in the real estate sector; capital gains from the sale proceeds could now be invested in two homes instead of only one as it is the case presently. This along with increased incomes with middle class is good news for the sector that is finding it difficult to dispose of its built-up inventory. There are a few other good measures such as pension scheme for unorganised sector workers and boost to affordable housing.

This is, without an iota of doubt, an election year budget. Almost everyone gets a share in the extensive sops announced by the FM. How the income and expenditure are going to be balanced is not clear at this stage. The Niti Aayog chairman explains that we have not assumed tax buoyancy for FY 20; we are expecting the revenues to grow by 14% while the last interim budget in 2014 had assumed growth rate of 19%. Yet it is not clear, where the money is going to come from. GST collections are not likely to go much above Rs 1 lakh crore a month; for the current fiscal they are averaging so far Rs 97,100 crore. There are no indications at least now that the economy is poised for a sudden spurt in growth. The interim budget might have put some money into the hands of people but for that to translate into consumption first and then investment would take quite a bit of time.

Disinvestment target is ambitiously put at Rs 90,000 crore. With the PSUs not in the best of financial state, one wonders how this target will be met. If the consumption push does not give the desired push to investment and jobs, then it will be a difficult situation. One has to see the fine print to understand how the fiscal deficit is projected at 3.4% for the FY 2020. The numbers simply do not seem to add up. If the fiscal deficit widens then the effect on inflation is inescapable. The fiscal prudence and restraint represents years of hard work, consolidation and discipline. At the altar of impending elections, it is not wise to throw it to winds. But that is precisely what has been done. Even if a new government (other than the present NDA) comes to power, it will find it difficult to make amends and deny certain sops. In a democratic setup, what is announced by the government becomes an entitlement.

In sum, this is just not a vote on account; it is a populist budget with sops for all. With some luck and better macroeconomic management, the economy could still pull it off but otherwise will pay a price for fiscal imprudence.