Sitharaman Budget: Long in form, short in content

The challenge of Budget making is to take enough from the 15 per cent of the population (about 200 million, or 40 million households) liable for direct taxes without dissatisfying 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 per cent who make little more than subsistence in terms of income — given their property and tradeable skills. This covers around a population of 700-750 million people, or 150 million families. These people have largely been bypassed by the huge growth gains made since 1998. That means under 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 doesn’t have too much discretion in tinkering to favour some and punish others.

The challenge for the government was very clear. It was to create jobs, and stimulate consumption to kickstart 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 per cent of GDP in 2010 and is now a good 11 per cent lower. Clearly, without an increase of capital investment, one cannot hope for more industrialisation and hence higher growth. The immediate task therefore is obvious. The government needs to step up investment in infrastructure to create demand for core sectors like cement, steel, building materials, power, etc, and create the millions of jobs needed each year to absorb the 12 million people joining the labour force each year.

Since 2014, under the NDA government, the increase in rural wages worked out to 4.7 per cent in nominal terms and a mere 0.5 per cent in real terms after netting out inflation of 4.2 per cent. 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 per cent. While CPI inflation for agricultural workers, too, averaged 11.1 per cent, 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 per cent of the population is below the age of 30. So quite clearly, we needed a plan to kick off growth once again.

At the tail end of her inordinately long speech, finance minister Nirmala Sitharaman made a passing reference to targeting a nominal GDP growth of 10 per cent. Consider this: the nominal GDP growth now is 6.08 per cent. So how do you get an increase of four per cent 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 '22.99 lakh crores of revenue receipts, '30.42 lakh crores as expenditure, leaving it with a fiscal deficit of 3.8 per cent. It means that the government expects to increase revenues by a little over '3 lakh crores. Similarly, expenditure is going to increase by a similar '3 lakh crores. At the same time, the finance minister expects capital expenditure to increase by 21 per cent. The Central capital expenditure in 2019-20 was '3.36 lakh crores. Thus, we can infer that this year capital expenditure will increase by about '60,000 crores. Now relate this to the '103 lakh crores for the Infra Pipeline announced by the finance minister late last year. Of this, schemes amounting to about '23 lakh crores were announced. But for this the new Budget provides a meagre '22,000 crores. This is still too little, and too late. What we were looking towards was a grand plan to announce how this huge sum is to be realised. There was not a word about it in her long speech of two hours and 40 minutes.

The speech was replete with minute details like '100 crores for the G-20 summit, which India will host next year, but not before she fondly alluded to how Prime Minister Narendra Modi will now take the top 20 global economies to new heights. Like George W. Bush had announced “mission accomplished” after occupying Iraq, Ms Sitharaman proclaimed that Swachchh Bharat was a great success, while every street corner and open maidan in the country tells us another story. So she announced just '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 due to 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.

Ms Sitharaman said the government had promised to provide piped water to all households in the country entailing an expenditure of '3.36 lakh crores. This was a rare instance of the government offering to puts its money where its mouth was.

Added to this, the government has to promise to deliver all this with a most expensive public administration (11.4 per cent 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 realised 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, both public and private. With the government’s coffers low and shrinking, where is the money to lead the expansion going to come from? This, to my mind, is Prime Minister 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 PSUs like Air India, Concor and LIC, from which the Centre 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, that 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 growth to go up, 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 the government’s chief economic adviser seems to have discovered. The world has moved on since Adam Smith!