The time that a Union Budget could deliver public expectations is behind us. The institution of a Union Budget as a tool to introduce change in the behaviour of economic agents in the short run has passed us by. The cycle of constantly-rising aspirations supported by a Budgetary exercise that led to the setting up of industries, creation of jobs, reduction in tax rates and increase in tax revenues, rise in corporate earnings, and jumps in market capitalisation has ended. The low-hanging fruit have been digested by three decades of reform, enterprise and growth, beginning 1991, that has seen India’s GDP jump six-fold to $3 trillion.
In the 2020s India needs a new way to look at and think about the Union Budget as a compendium of national economic aspirations. The old way is going, and most of it – indirect taxes, for instance – has already gone since 2017. The Budget, therefore, has become an exercise in balancing the books of the government: revenues, expenditures, borrowings. Throw in a few policy intents here and the Budget Speech drives headlines the next day. Sprinkle a token change there and the Sensex answers with a 1,000 point rise. All the while, the constituency of entrepreneurs stays unaddressed, the constituency of the rich remains over-taxed, and their takeaway from the Budget remains nothing.
Finance Minister Nirmala Sitharaman’s Budget 2020 will be unable to address the biggest problem of the 2020s – economic growth. As an accounting exercise the Budget will deliver more of the same. The discussions following it will be a series of predictables – it will be criticised because defence, education and health will not get the right funding; a few thousands extra in the hands of taxpayers will generate a short round of applause; ‘captains of industry’ will give it 7 to 8 out of 10. Already blunted by an adversarial approach to wealth creators, politics has clouded any rational understanding of the economy. In its second term, the economic discourse remains hijacked by the Opposition. The ‘suit-boot ki sarkar’ slogan, a decaying relic of the past, continues to haunt our future.
Today, there are as many ideas as there are economists. Unfortunately, their dominating thought and overarching obsession has been and continues to be to redistribute wealth. The alternative voices that talk about wealth creation are slowly beginning to emerge but they will take their time to get heard and longer to be implemented. It is far easier to engage with pro-poor virtue-signalling and handouts than to take up the difficult task of working on business climate change. So far down the poverty road have we travelled that we have lost the skill of thinking about prosperity. But let us assume that Nirmala Sitharaman has the strength of will to break out of these clutches, take all good ideas on board and offer them in Budget 2020. What will that result into? Nothing in the short term, as investments need time to work out, more time to express themselves in the form of new enterprises, and even more in contributing to output.
Let’s see what she can do in this Budget. First, she has to decide if she wants to breach the fiscal deficit target. We believe she should, others insist she shouldn’t. Let’s assume she does. Then, we come to the second point. How does she propose to spend that money? If it is towards more wealth redistribution schemes, say goodbye to growth. If it is infrastructure, it can be a growth driver and a job creator in the short term, and if enough enthusiasm is created, could catalyse enthusiasm for secondary economic activities down the line. Finally, we come to the third point: where will the money come from? Higher taxes – in a slowing economy that will be economic suicide. Disinvestments – a good idea for several reasons but what happens next year once the money has been spent? Borrowings – that will lead to inflation. The Sensex may rise but that’s about it.
Whatever she does, it will not change anything in the short term in the real economy. Here’s a suggestion for Sitharaman: take a medium-term view. Allow the Budget to balance the expenditure and revenue but make all other policy announcements keeping an impact factor of 12 to 18 months in mind. This is the time entrepreneurs will need to create new businesses or expand existing capacities. She should also step out of the Ministry of Finance and persuade all other economic ministries towards a singular and cohesive economic policy narrative. Credit flows need special attention, so she would need to engage with the Reserve Bank of India. In the next three months these schemes should be on the road and give confidence to entrepreneurs to invest in India rather than buy businesses in Europe or plantations in Africa.
As far as Budget 2020 goes, perhaps a little tinkering would give us an indication that the government is at least half as serious about the economy as it is for social change. Here, she should do to individual direct taxes what she has done for corporate taxes – reduce them sharply but remove all exemptions. In her September 2019 Taxation Laws (Amendment) Ordinance, she reduced corporate tax rates to 17.01% for new companies and to 25.17% for existing firms, provided they stop availing of any exemptions or incentives. We are yet to see the impact of this policy, but it’s been only five months, so we need to give it time. If Budget 2020 delivers these to individuals, it will generate enthusiasm among taxpayers, and simplify the mesh of India’s tax laws. Further, she must revive and lead the economic discourse around expanding the tax base by reducing the lowest rate but making it applicable to a much lower income slab. Three noise-free slabs of, say 5%, 10% and 20%, will help.
But the hard work the government needs to do – and which Sitharaman must initiate with not just other ministries but State governments as well, by making economic arguments with growth and jobs as anchor – is around land and labour reforms. Again, the debate around land has been laid to rest and will take a third term of this government or a new coalition to revive it. Work on labour reforms has begun but is largely tinkering. That is, to rearrange the 51 Central laws into four Codes of wages, industrial relations, social security and safety, health and working conditions. Other than keeping a few bureaucrats busy, this will not deliver any returns. What’s the point in wasting time in rearranging last century’s ideas, when what’s required is reimagining them for the 21st century?
The real challenges to the Indian economy can no longer be addressed by the Union Budget. We need to go one or two levels lower. The government needs to identify administrative hurdles before doing business. It needs to ask, and answer, the question as to why is it that despite the government’s best intentions an increasing number of businesses are busy with the business of compliance, particularly in GST that was supposed to simplify indirect taxes, than in expanding markets. The aggregate answer lies in the approach to business itself: the tyranny of 1,074 laws that oversee economic activity; the 58,726 compliances that businesses have to follow; the 3,069 filings the regulatory structure requires from businesses every year.
Surprises, if any, in Budget 2020 notwithstanding, Sitharaman has little room for manoeuvre. Outside North Block, a crisis is heading our way. The real task before her lies outside too. Less, not more, regulation or inspection is the way forward. Sitharaman needs all the ideas, all the skills and all the nerves to bring all economic ministries and State governments together and steer the State out the way of entrepreneurs. Economic growth will be a sweet by-product, on which will ride the well-being of voters and the build-up of political capital.
As for Budget 2020: it should simply balance the books and let go of all other short-term ambitions.
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Gautam Chikermane is a Vice President at ORF. His areas of research are economics, politics and foreign policy. A Jefferson Fellow (Fall 2001) at the East-West ...
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