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Budget – An economic catalyst for growth

Summary

The effects of a government's budget on society and the political economy are
of considerable concern to economists as well as to consumers and taxpayers. The
original contributions in this report analyse all of the budget's components
expenditures, revenues, the deficit - with a special emphasis on issues that have
assumed increasing importance over the last decade or so, such as intergenerational
transfers of debt and declines in corporate tax revenues.

It deal with both microeconomic and macroeconomic aspects of the effects of

budgets, and demonstrate how budgetary policies affect inflation, efficiency, the
balance of payments, exchange rates, and the decision-making process. The
contributions are grouped into five sections. The first covers the revenue side of the
budget - taxation policy and its interaction with emigration, corporate tax revenues,
personal income taxes, and fiscal policies.

The second takes up intergenerational transfers, consumption

decisions, and equivalence and neutrality. Budget deficits and optimal policies,
inflation and its relationship to budget deficits are examined in parts three and four.
The Report concludes by looking at stabilization in open economies, and includes
treatments of the consequences of balance-of-payments crises, exchange rate
management under uncertainty, and foreign exchange operations. Now, we see what
impact on the Economy by Budget 2019
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MAJER POINT OF BUDGET

A. CONSUMPTION AND INVESTMENTS

The survey said investment can be a ‘key driver’ of simultaneous growth in

demand, jobs, exports & productivity. It said India needs to almost double its annual
spending on infrastructure to $200 billion and the real challenge lies in harnessing
private investment.

 WHAT TO EXPECT:

Antique Stock Broking believes the government would spur consumption by

increasing disposable income by tweaking tax slabs. Budget is expected to support
rural demand by increasing allocation to various rural centric schemes.

B. JOBS AND MSMES

In the chapter titled 'Nourishing Dwarfs to become Giants: Reorienting policies

for MSME Growth', the Survey observes that once small firms know that they would
receive no benefit from continuing to remain small despite ageing, their natural
incentives to grow would get activated. This will generate economic growth and
employment. "According to the extant policy, certain targets have been prescribed for
banks for lending to the micro, small and medium (MSME) sector that exacerbates
perverse incentives to firms to remain small," the survey said.

 WHAT TO EXPECT:

According to Elara Capital, MSME and water sectors. “We expect the BJP
election manifesto to guide new spending priorities. Among key schemes, we expect
the government to announce collateral-free loans of up to Rs 50 lakh for
entrepreneurs, a scheme for providing short-term agriculture loan of up to 0.1mn at 0
per cent interest rate for a tenure of 1-5 years, sugar subsidy for below poverty line
(BPL) families, pension scheme for small and marginal farmers and a revamped
scheme for piped water supply to rural households apart from announcement of
expansion of Pradhan Mantri Kisan Samman Nidhi Yojana to all farmers,” the
brokerage said.
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C. PUSH TO REFORMS

The Survey said the moderation in growth momentum was mainly on account
of lower growth in agriculture, trade, transport communication and services related to
broadcasting, among others

 WHAT TO EXPECT:

Agricultural reforms (on contract farming, marketing reforms etc.) may be

announced in order to achieve the government’s stated objective of doubling farmer
income by 2022, according to Antique Stock Broking.

D. BOOST TO INFRASTRUCTURE

Terming highways as a catalyst for economic growth, the Economic Survey said
private sector investments in the sector remained ‘tardy’ as such investors are
interested in putting their money only on a short-term basis.

 WHAT TO EXPECT:

We believes tax-free bonds may be reintroduced to fund long-term

infrastructure projects.

E. FISCAL DEFICIT

The survey estimated fiscal deficit for 2018-19 at 3.4 per cent, the general fiscal
deficit - Centre and states combined -- at 5.8 per cent in 2018-19, down from 6.4 per
cent in the previous fiscal.

 WHAT TO EXPECT:

We expects slight slippage in fiscal deficit target from earlier estimates of 3.4
per cent (Interim Budget) given the social agenda and need to pump-prime the
economy amid slowdown in demand.

F. BANKING AND NBFCS

The survey said performance of the banking sector has improved as bad loans
declined in last fiscal, but financial flows are constrained due to a fall in money raised
from capital markets and stress in the non-banking financial sector.
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 WHAT TO EXPECT:

B Gopkumar, ED & CEO, Reliance Securities said elevated banking sector

NPAs and defaults on debt repayment in the non-banking finance sector (NBFC) has
created a crisis in the financial sector. Infusing more capital into the public sector
banks, removing roadblocks for speedy resolution of IBC cases and incentivising
banks to buy good quality NBFC assets may ease the financial sector woes. Similarly,
focusing on shadow banking and housing finance companies by creating a liquidity
pool would act as a catalyst for growth.

G. DISINVESTMENT TARGET

The Finance Ministry has made progress in strategic sale of 28 state-owned

companies, of which three have already been sold off in the previous fiscal. “Progress
was made in respect of the 28 cases of Strategic Disinvestment approved by the
Government, which are at different stages, with three companies strategically sold off
during FY 2018-19, namely, Hospital Services Consultancy Corporation, Dredging
Corporation of India (DCIL) and National Projects Construction Corporation (NPCC),"
the Survey said.

 WHAT TO EXPECT:

Disinvestment target for FY19 of Rs 80,000 core was achieved with

considerable support from sales within PSUs. Interim Budget had proposed a
disinvestment target of Rs 90,000 core which might be increased to Rs 1, 00,000 core.

H. RURAL DISTRESS:

The Survey highlighted that there is a need to develop a real-time indicator of

rural distress by using data related to work demand by MGNREGA workers.

 WHAT TO EXPECT:

Gaurav Dua, Sr VP, Head – Strategy & Investments, Sharekhan by BNP

Paribas, said the government is expected to propose measures to boost consumer
demand and ease rural stress to support the economy. The fiscal stimulus could be in
form of higher government spending on infra development, which positively impacts
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core sectors like cement, steel and construction and has trickle-down effect on
incomes and consumption.

I. WATER MANAGEMENT

The Weather Department has projected less rains in some region which could
affect the crop production in those areas, the Survey said. It also called for framing
new policies to improve water use efficiency in the agriculture sector.

 WHAT TO EXPECT:

Market experts are expecting thrust on improving drinking water availability and
river linking. “If Swacch Bharat was key focus of Modi during his first tenure, the “Nal
se Jal” is likely to be the focus during his second tenure,” said Elara Capital.

J. UPDATES ON SMART CITY

The Survey also showed that projects worth over Rs 2.05 lakh core are
proposed in 100 cities under the Smart Cities Mission and a significant progress has
been made in terms of implementation of these projects.

 WHAT TO EXPECT:

B Gopkumar forsees a rise in apex of railways and defence, higher allocation

to smart cities and rural electrification schemes.

BUDGET: A CATALYST FOR SOCIAL AND ECONOMIC

TRANSFORMATION

The Budget has always been interpreted as an instrument of social and

economic reforms alongside an innovator of far-reaching reforms in fiscal policies. It
has a vital role to play in the economy of a welfare state as it aims at bringing social
and economic transformation by removing inequalities, poverty and unemployment.
As an important step towards the overall development of the nation, the Budget
focuses on fulfilling the dreams of every section of society, including the poor and the
under-privileged—farmers, tribal people, Dalits, oppressed, and women. Therefore,
the Budget presents a prospect for the government of the day to introspect its
performance for the past year, and for last five years in an election year. It almost turns
out to be an election manifesto of the ruling party, where the government is not only
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expected to outline its accomplishments but also affirm its vision for the future. Over
the years, democratic participation by all stake-holders has brought greater
opportunities as well as greater challenges for India’s budgetary process.

 ASSURING FEW EXPECTATIONS

It was expected that with a landslide victory the ruling party would present a
Union Budget to chalk out the roadmap to achieve not only its unfinished goals and
objectives but also aim at fulfilling many aspirations of the people. However, a major
challenge was the trajectory of a declining economic growth in the last few years from
8.2 per cent to 7.2 per cent, 6.8 per cent, and 5.8 per cent, which was the lowest at
the end of the fourth quarter in 2018-19. Introducing fiscal stimulus for economic
revival was difficult with the growth rate at its lowest in five years and no picking up in
the investment. Both the Inter-national Monetary Fund and World Bank have lowered
India’s expected growth rate in the current fiscal.

Therefore, the most important need was to redraw an appropriate economic

model to sustain a higher economic growth alongside focusing of social security to
ensure the well-being of the people. The Economic Survey 2019 focuses on moving
to a ‘virtuous cycle’ of savings, investments and exports to transform India into a $ 5
trillion economy in the next five years, that is, by 2024. It has projected the economic
growth to pick up at seven per cent in the current fiscal, but states that a sustained
eight per cent growth is important to achieve the target as a major economy. It states
that decline in the Non-Performing Assets should help push the capital expenditure
cycle and investment as a percentage of the GDP has to be in excess of 30-35 per
cent. The approach of the Economic Survey focuses on legal reforms, ensuring policy
consistency, encouraging behaviour change using behavioural economics, nourishing
Micro, Small and Medium Enterprises (MSMEs), reducing cost of capital and reducing
risk-return trade-off for investment. Krishnamurthy Subramanian, the Chief Economic
Adviser, argues that for job creation to happen, it is the young firms that need to grow
and exploit the economies. It is significant to focus on unshackling the MSMEs and
enabling them to grow, thereby creating jobs and exports in the economy.
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With a mission to make India a major growing economy, the Budget centres on
a higher rate of economic growth for continuous years. The growth-oriented Budget
encourages corporate sectors/private enterprises to invest more by enabling them to
raise more money from the capital markets. Arguing in favour of an investment-driven
growth as a must, the Finance Minister, Nirmala Sitharaman, stated that the country
required Rs 20 lakh crore worth invest-ment per year. Steps to enhance investments
in infrastructure, liberalisation in the Foreign Direct Investment (FDI) policy, lowering
of corporate tax to 25 per cent for small enterprises and the allocation of Rs 70,000
crores towards capital for Public Sector Banks (PSBs) are important. The government
believes that private investment will grow with recapitalisation of the PSBs. In addition,
raising funds globally by borrowing will contribute towards the $ 5 trillion economy
growth aspirations.

The focus on flow of more money into the Indian economy through FDI
proposals and raising more money through Public Private Partnership (PPP) with a
push to infrastructure, construction, real estate, production, growth, job creation,
demand and exports—all feeding into each other—‘will enable the animal spirits in the
economy to thrive’. The government promises to bring the fiscal deficit to 3.3 per cent
from 3.4 per cent as was projected in the Interim Budget. The Finance Minister
emphasises that rather than Nehruvian socialism, it is fiscal prudence and fiscal
consolidation which matter. Since a major factor that paid the BJP in the recent
elections was the trust to benefit from some of the social welfare schemes such as
Swachh Bharat Abhiyan, Ayushmaan Bharat, Ujjwala Yojana, Saubhagya Yojana and
Jan Dhan Yojana, a new paradigm of welfare in the Budget focused on the expansion
of these schemes that promised benefit to every section of society.

The Finance Minister stated that people’s hearts having been ‘filled with Aasha
(Hope), Vishwas (Trust), Aakansha (Aspirations)’, the government is compelled to re-
emphasise on schemes such as MSMEs, start-ups, defence manufacturing,
automobiles, electronics, and medical devices under Make in India, building physical
and social infrastructure, self-suffi-ciency and export of foodgrains, pulses, oilseeds,
fruits and vegetables, achieving a healthy society through Ayushmaan Bharat,
improving nourish-ment of women and children, and safety of citizens.
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She argued for the extension of several schemes that ‘have transformed the
lives of every rural family, dramatically improving ease of their living’ such as the
pension benefits under the Pradhan Mantri Karam Yogi Maan Dhan Yojana that
provides Rs 3000 per month as pension on attaining the age of 60 to workers in the
unorganised and informal sectors, electricity and clean cooking facility to all willing
rural families through the Saubhagya Yojana and Ujjwala Yojana, housing for all
through the Pradhan Mantri Awas Yojana—Gramin, all-weather connectivity
connecting the eligible and feasible habitations through the Pradhan Mantri Gram
Sadak Yojana, digital literacy in rural India through the Pradhan Mantri Gramin Digital
Saksharta Abhiyan, and encouraging women entrepreneurship through the National
Rural Livelihood Mission that impacts 52 lakh women Self-Help Groups (SHGs) as Rs
5000 would be given to members possessing Jan Dhan Bank account, over and above
their savings, and at least one woman per SHG would be eligible for a loan of Rs 1
lakh under the Prime Minister’s MUDRA scheme. For the safety of women Rs 500
crore has also been granted to the Nirbhaya Scheme.

She stated that higher education in the country will be reformed

comprehensively through a new education policy, and the government will make
renewed efforts to promote research in the country. The focus on the Jal Jeevan
Mission to achieve Har Ghar Jal (piped water supply) to all rural households by 2024
and formation of a New Jal Shakti Mantralaya by merging the Ministries of Water
Resources, River Develop-ment and Ganga Rejuvenationalong with Drinking Water
and Sanitation to look at the management of water resources and water supply in an
integrated and holistic manner is certainly a positive step to ensure the basic rights of
the people.

 Ignoring few Concerns

However, while the Budget speech focused on gaon, garib and kisan (villages,
poverty and farmers/peasants), the Budget has not been able to break any new ground
to increase the income of the ordinary people both in rural as well as urban areas. Two
major uncertainties that remain unaddressed are generating employ-ment/job creation
and agrarian crisis/farmers distress. While it boosts investment in select industries, the
word jobs did not find a mention in the Finance Minister’s speech.
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Despite the election campaign that promised to convert job- seekers into job-
creators, we see a large decline in the labour force participation and an increase in
joblessness. The data released by the Labour Ministry reveals that the unemployment
rate was 6.1 per cent in 2017-18 which is arguably the highest in fortyfive years, that
is, since 1971. The Centre for Monitoring Indian Economy (CMIE) report 2019 finds
that over the years, the count of employed is decreasing and that of the unemployed
is increasing steadily. Unemploy-ment has increased by a substantial 11 million by
December 2018. Job losses are also concen-trated amongst the wage labourers,
agricultural labourers, small traders, and in particular the women in rural India. In such
a context, it is difficult to comprehend that the Mahatma Gandhi National Rural
Employment Guarantee Act (MGNREGA) has received less grant than last year’s
revised estimates.

While the Prime Minister argues that the Budget underlines structural reforms
in the agricultural sector with a roadmap to transform the sector to double the farmers’
income, the feeling of disappointment amongst the farmers’ groups is high as the
Budget has ignored many of their concerns. In a situation of agrarian crisis and
drought, there is no drought relief in the Budget. There are no significant reforms or
strategies announced for boosting agriculture and farmers’ incomes or reaching the
target of doubling the farmers’ income by 2022. Though the expenditure Budget for
the Ministry of Agri-culture and Farmers’ Welfare has jumped from Rs 67,800 crores
to Rs 1,30,485 crores from 2018-19 to 2019-20, which is more than 92 per cent, the
lion’s share of the climb is meant for the Pradhan Mantri Kisan Samman Nidhi (PM-
KISAN), which provides Rs 6000 for each farming household per year. While a jump
from Rs. 20,000 crores to Rs 75,000 crores underlines the biggest policy shift towards
direct income transfer, the poll promise and Cabinet decision to expand the scheme
to all the farmers has not been reflected in the Budget.

Though the Budget announces ‘zero budget’ agriculture which will promote
zero-based natural farming, it continues to provide a rise of Rs 10,000 crores over last
year for the chemical fertiliser subsidy. Most of the subsidy is confined to the fertiliser
companies and excludes small and marginal farmers. Policy-analysts argue that while
organic farming is fine for niche markets, it is significant to allot money for Research
and Development (R&D) on mass production at a low cost. The Economic Survey has
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highlighted that India spends only 0.37 per cent of agriculture GDP on R&D in
agriculture and therefore a boost in productivity is not possible. Though the Budget for
the PM Krishi Sinchai Yojana (PMKSY) is raised by 17 per cent, it is insufficient to take
care of the irrigation needs of agriculture. The per drop more crop scheme is budgeted
at just Rs 3500 crores. The Budget reiterated the government’s earlier goal of bringing
in more regulated agriculture markets on the electronic National Agriculture Market (e-
NAM) platform.

The policy initiatives and market intervention such as strengthening e-NAM,

and the hikes in farmers’ welfare schemes, including crop insurance, price support and
Pradhan Mantri Annadata Aay Sanrakshan Abhiyan (PM AASHA) procurement
scheme, and making annadatas (producers of foodgrains) also as urjadatas
(producers of solar power), are insufficient and do not address the root causes of
persisting farmers’ distress. Agriculture has to be understood beyond increasing farm
produce. Strategies to integrate farming with procurement, marketing, and pricing,
need to be worked out to benefit the farmers.

 ARTICULATING A VISION

Nirmala Sitharaman states that the Budget reflects long-term goals and the
government has a vision for ten years in mind. She argues that it is the behavioural
economics that will work as a catalyst for transformational change. Arun Jaitley, the
former Finance Minister, states that the Budget creates a political direction for an
aspirational India as it ensures prosperity and growth for the lower sections as well.
Amitabh Kant, the Chief Executive Officer of NITI Ayog, claims that it is a path-breaking
and comprehensive Budget. Hailing it as full of hope and boosting confidence, Prime
Minister Narendra Modi stated that the Budget for ‘New India’ gives an assurance to
the new desires and many expectations of the people.

He argues that it is citizen-friendly, development-friendly and future-oriented,

which will make India pros-porous as it promises a better tomorrow to the youth. It laid
the foundation for an inclusive and progressive nation with a roadmap to transform
India by 2022 that will mark the completion of 75 years of India’s independence. He
calls it a Green Budget as it focuses on clean energy and environment, and promises
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a pollution-free India, alongside focus on water management, clean rivers, and a Blue
Economy.

While the Budget will always remain significant for the government to regain its
control over the political narrative, the more inquisitive question is whether the Budget
articulates a vision. Though it is important not to get the Budget wrong, there is
disappointment for those looking for radical reforms. In the context of serious job woes
and agrarian crisis in the country, the Budget disappoints the unemployed youth and
farmers in particular as no reforms were announced to ease the biggest problems. An
increasing feeling of disappoint-ment is obvious as the Budget intends to take no
transformative role.

The debate on the Budget in Parliament underlines the criticism by the

Opposition parties as it has given no meaningful relief to any section of the population.
The Congress party reasoned that despite a huge mandate, the BJP Government has
failed to announce any ‘bold’ decisions or structural reforms, which will result in a
status-quoist economy. While a weak economy needs a bold approach, the Congress
party claims that the Budget insists only on increasing investment to spur the economic
growth and completely lacks such a vision. The leaders of the Biju Janata Dal believe
that the Budget favours the corporate sector. The Communist Party of India contends
that it is a fraudulent Budget with anti-labour labour codes. The Trinamul Congress
criticises it as a dream Budget which is selling dreams instead of delivering.
Notwithstanding the ruling party’s constant attempt to gain political advantage by
promising a higher GDP growth rate and the Opposition parties’ unceasing effort to
contest the possibility of attaining such a growth rate, it is significant to raise demands
which will raise the capacity utilisation in the economy and a consumption boost which
will lead to an increase in investment in productive capacity.

While the Economic Survey provides a roadmap to strengthen the Indian

economy and has identified the demand problem as a major economic problem, it
suggests raising investment in the economy and focuses on solutions centred on the
supply side. The dependence on international financial markets for borrowings will
result in increased control and manipulation of the country. While the private
companies are expected to deliver economic growth through private investment or
private consumption, much remains to be seen. However, even if the target of
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economic growth is achieved, a larger economy on its own does not explain well-being
for all.

Farmers are a distressed lot, and their distress is not an aberration but a
constant in terms of deprivations and denial of the right to basic resources of livelihood.
Abysmal poverty, landlessness, increasing alienation of land, disentitlement to forest
and water for the marginalised, increasing control over the productive resources by
the dominant class, and consistent decline in the proportion of cultivators and
corresponding increase in agricultural labour have resulted in persistence of distress
for certain sections of the farmers. In fact, the government announced no radical
change in agriculture.

Though the Finance Minister argues that there is a shift in the approach from
women-centric-policy-making to women-led initiatives and movements, without
altering the power relations determined by unequal and hierarchical structures in
society and involving women in decision- making at the local level, women will remain
vulnerable to disentitlement and disempower-ment and many women-targeted
schemes will merely remain relief measures. In fact, a comprehensive understanding
of the Budget makes it significant to move beyond its promises and targeted
objectives, to understand the every-day impact it has on the lives of the people. In
addition to monitoring the strategy, implemen-tation and impact of social welfare
schemes, substantial changes at the ground level need to be evaluated. There is still
much that needs to be addressed for an adequate understanding of the idea of
development and well-being that the ordinary people assent. It is vital to get the basics
of welfare policies correct to ensure minimum living conditions.

Upside & Downside Of budget

Upside:

There are not many direct announcements related to employment in the Interim
Budget, but it does address the issue via more incentives and concessions to several
major sectors of the economy, such as infrastructure, real estate, and agriculture. Take
agriculture; India’s agrarian economy is labour-intensive, accounting for millions of
jobs. Growing it through direct income support and easy loan schemes and interest
subvention measures can generate rural employment, apart from building prosperity.
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A pension scheme for 85% of the country’s workforce – the unorganised sector
– is a social security measure for them, which promises to lift emotional well-being and
reduce the incidence of poverty in old age, apart from boosting demand in the
economy. Tax cuts too will boost demand and their positive impact will be felt across
sectors.

Downside:

One criticism that has been levelled at the Modi government over the past few
years relates to job creation; critics of the PM say he has not delivered on his pre-poll
promise of creating two crore new jobs every year if his party was voted into power in
2014. There is little clarity on the level of success as no official data on the state of
employment or unemployment been released in recent years. This Budget also stayed
away from citing data, keeping alive suspicions that the announcements were made
keeping in mind the elections.

How will the money be transferred to a worker in the informal sector? Most do
not have bank accounts. In the absence of any clear-cut plan on this, the
announcement runs the risk of boiling down to an empty pre-poll gimmick.

Furthermore, Moody’s strikes a warning of a different note: the credit rating

agency says that while farm sops and tax cuts will give a fiscal stimulus of about 0.45%
of the GDP, it will also lead to loans getting costlier in future

The End