Private sector investment is at a 15-year low
Indians are obsessed with the annual budget of the government, like no other country in the world.
After the finance minister presents the budget every year, citizens begin to ask familiar questions. How will the budget impact me? What has become expensive? What has become cheaper? Do I save more on tax or do I pay more?
This year there was more interest in the budget – presented in the parliament on Saturday – given that the economy has slowed down big time.
India’s Gross Domestic Product (GDP) – the value of goods and services produced in the economy – is expected to grow by 5.7% during the current financial year. This is the slowest since 2012-13, when the economy grew by 5.5%.
This is primarily on account of a slowdown in private consumption. During the first six months of 2019-20, private consumption grew by just 4.1%. People are not spending money like they used to.
In this scenario, it was widely expected that more money will be put in the hands of people to encourage them to spend.
Finance Minister Nirmala Sitharaman cut personal income tax rates and also introduced a new alternate tax system.
In the current system, taxpayers get rebates on their savings and loans. But those who opt for the new system, will have to forego these exemptions.
So taxpayers have the option of following the old system – where they pay higher tax rates but can claim deductions and exemptions – or opting for the new system – where they pay lower taxes but cannot claim any exemptions.
Read more about the Indian economy
The trouble is that making this decision requires an understanding of India’s complex income tax laws.
Also, the budget has not answered the basic question that every income taxpayer has: Has my income gone up?
This was crucial amid a slowdown. If the finance minister had simply cut taxes, without further complicating the income tax system, taxpayers would have been certain that their income would increase. This would also have encouraged them to spend money, helping spur economic growth.
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Ms Sitharaman cut income tax rates
During an economic slowdown, politicians and governments typically drawn on British economist John Maynard Keynes.
Keynes had said that in times of economic trouble, the government should become the spender of the last resort. He even suggested, rather rhetorically, that the government should get people to dig holes and fill them up so that this money could be spent and would help in economic recovery.
India’s equivalent of the “dig holes and fill them up” scheme is the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).
Its mandate is to provide at least 100 days of guaranteed work every year to adult members of every rural household who are willing to do unskilled manual labour.
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Sales of cars and SUVs have slumped amid a slowdown
But the allocation for this scheme this year has been cut to $8.6bn (£6.5bn) from $9.9bn (£7.5bn).
This was the quickest way of putting money in the hands of the poorest of the poor, who have been hit hard by the slowdown. But the finance minister decided instead to slash the budget for the scheme.
This thinking primarily appears to come from the fact that the Narendra Modi-led government has refused to acknowledge that the country is going through an economic slowdown.
At the heart of any government budget is the tax revenue that the government hopes to make in order to finance expenditure.
In 2020-21, the government hopes to earn $338.5bn – 12% more than what the government hopes to earn this year. It’s an extremely optimistic assumption given that during 2019-20, tax revenue is estimated to go up by just 4%.
The government is also expecting a massive increase in disinvestment receipts, or money that the government makes by selling its stake in state-run companies.
In 2020-21, it hopes to earn $21.3bn through disinvestment. This is 223% more than the money that the government hopes to earn through this route in 2019-20.
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Farmers protest regularly, demanding higher crop prices and loan waivers
The big news in disinvestment is that the government plans to sell a stake in Life Insurance Corporation (LIC) of India, the country’s largest insurance company.
This is good news at some level because it will mean that the transparency of the state-owned LIC, which is an opaque organisation, will improve.
On the flip side, this will lead to political opposition and protests, which the government will have to deal with. Also, until now, LIC has acted as the internal financier of the government and has been used to bailout the government on multiple occasions. So it will be interesting to see whether this equation changes in the future.
To conclude, a better effort was needed in the budget, especially given the fact that India is now growing at under 6% in comparison to the dreams of 10% growth that the country has been sold over the years.
Vivek Kaul is an economist and the author of the Easy Money trilogy