There was hardly a logical interpretation of Lewis Carroll’s Jabberwocky! Apparently construed as nonsense, it is an epitome of linguistic ingenuity that hardly found a parallel in English literature. Despite the nonsense being a shock to conventionalism that derides and rejects such proclivities, its deep innate interpretations created a new order in literature! This is not only for literature, but often new thinking apparently believed to be nonsense from a very conservative perspective has been the fountainhead of disruptive innovation. As an example, chortle (used for the first time in Jabberwocky) was later incorporated in English lexicon and interpreted as a combination of chuckle and snort!
After hearing the various criticisms of the Union Budget 2020-21 from the opposition and the luddites, we were drawn to draw this analogy of the Budget and its criticisms with Jabberwocky and nonsense. Many have called this Budget directionless, which is either result of wrong interpretation or result of being myopic or result of being inherently and committedly biased against the current dispensation. Let us first clarify our position on this first.
The long Union Budget 2020-21 speech by Finance Minister (FM) Nirmala Sitharaman stressed on “Ease of Living” as the target variable addressed through three main themes: Aspirational India, Economic Development, and Caring Society. Aspirational India focuses on farmer welfare to bridge the rural-urban gap alongside human capital enhancement through policy announcements on issues such as water, health and education; Economic Development focuses on long term infrastructure investment to enhance productive efficiency and the “Ease of Doing Business”; and finally ‘Caring Society’ is woven around pillars of an inclusive society, conservation of cultural heritage while taking into account the issues of climate change and environment.
There is no denying that two major instruments that can lead to these holistic goals cited in the Budget are governance, and the functioning of the financial sector. The FM’s statements create the expectations that possibly the Indian policy-making framework has matured beyond its age-old reductionist way of looking merely at the growth numbers as the absolute indicator of development, and, in true sense, is moving towards comprehensively defining development in terms of the various Sustainable Development Goals (SDGs). An example of this phenomenon can be noted in the way it has imbibed climate concern in the development paradigm. The scheme to enable farmers to set up solar power generation capacity on their fallow/barren lands and to sell it to the grid is akin to creation of market mechanism for sustainable development financing. On the other hand, the emphasis on infrastructure development is prone to create long-term employment, and will create enabling conditions for long-term growth. These are all embedded in SDGs. The reason why the nation’s macroeconomic planning needed to maintain parity with the 17 UN SDGS is because almost all the SDGs are embedded in one form of capital or the other, i.e., human (SDGs 1 and 6: reflecting on poverty, hunger, health, education, water, sanitation, and gender equality), physical (SDGs 8 and 9: employment, growth, industry, innovation and infrastructure), natural (SDGs 14 and 15: life below water and land respectively) and social (SDGs 10 and 16: social institutional variables, etc.). In a previous research by us, we have shown that promoting SDGs essentially improve business competitiveness in an economy thereby creating enabling business conditions.
There has been much conjecture around the looming crisis over the Indian economy with the growth rate at an 11 year low of approximately 5%, a fragile labor market with an unemployment rate at a 45 year high of about 6% and most importantly a faltering consumer confidence, the FM was expected to give an objective direction to come out of this conundrum. In an ordinary year, when the economy was on an upward track, this Budget would seem like an excellent combination of progressive economic thinking and holistic developmental agenda. On paper, this Budget does portray a long term vision for development, by investing in the economy’s productive capacity, creating scale economies and improving the labor market – but this time it wasn’t devoid of its major drawbacks.
Firstly, the FM did stick to the archaic assumptions in the context of addressing the issues of the agricultural sector. In the background of the Indian agricultural supply-chains which are complex and inefficient the concerns of risk management in terms of yield risk, event risk, price risk, and demand shocks still loom large. A few issues in this sector which has not been addressed by this Budget include – inadequacies in risk management of largely consumed crops, price-rise trickles not influencing the farmers’ income, and the sorry state of the agri-derivatives market. The Kisan credit facilities were enhanced by leaps and bounds based on the theory that agricultural credit can boost the productivity in the sector which may be a faulty and orthodox way of looking at this issue. A study by Prof. Sudha Narayan in 2015 has shown that while credit flow may be an enabling factor for the inputs, the stagnancy of agricultural productivity is dependent upon the lack of technical efficiency fuelled by the lack of institutions for risk management and efficient marketing.
Secondly, despite the Government’s focus on Ease of Doing Business as the basic force to augment the Ease of Living theme, there were many a lacunae in the policy planning towards business promotion. Despite some major steps like abolishing the Dividend Distribution Tax that helps corporations and boosts the financial markets, there were expectations about abolishing the Commodities Transaction Tax (CTT) which has been responsible for driving out volumes from the commodity derivatives markets, and possibly leading to a lafferisation (tax revenue loss due to transaction volume loss), and impairment of the hedging efficiency of the Indian commexes. Yet, not only the CTT remains, but it has further been introduced over all forms of derivatives products apart from futures in which it was already prevailing. This, practically, makes India the costliest venue for risk management, as CTT hardly exist in any other economy. This is clearly in conflict with the fact that the Budget implicitly acknowledges that the transaction costs (monetized and non-monetised) in the economy is high and the Economic Survey 2019-20 shows that such high transaction costs are coming in the way of Ease of Doing Business.
On the other hand, recent literature shows that sustainability parameters has a key role to play in enhancing the Ease of Doing Business in India’s competitive federalist structure. A study by Ghosh et al (2019) suggests the SDG achievement status of the Indian states is a statistically significant variable explaining the “Ease of Doing Business” index, and FDI flows to the state which means that a region’s development policy vis-à-vis SDG promotion cannot be divorced from its investment promotion strategy. Interestingly, despite the Budget’s aims were at par with the targets of the SDG Agenda 2030, there is hardly any recognition that business competitiveness is hugely affected by transaction costs that may also arise from the costs of hedging, setting up businesses, and compliances.
Thirdly, while the Budget seeks to rationalize the GST, what it has done with personal income tax, is amusing. The multiple tax rates, rather than rationalizing the tax structure creates further complications, and is prone to increase the cost of compliance. In these turbulent times of growth deceleration, the FM has been adventurous enough to not be bothered about fiscal prudence, and has given substantial relief to the common man with income tax burden reductions so that the consumption demand rises. The tax cuts are slated to make a serious gap on the fiscal situation in the upcoming years where lies a high chance of missing the fiscal deficit target of 3.8% of GDP. Against this backdrop, it is for time to tell whether the gamut of long-term investment plans of the government is viable for the years to come.
Finally, the FM played with the idea that India’s consumption-led growth story is an organic one. It fails to acknowledge that spirit of consumption and investment in the economy is faltering perennially – the SENSEX and NIFTY plunging as the FM delivered her Budget speech bears testimony to this fact. Despite the much-expected income tax cuts to boost consumption in the new regime, it is important to note that the majority of the tax collected comes from the more affluent taxpayers whose propensity to consume is low as compared to the citizens belonging to the lower financial classes, who are essentially out of the taxation ambit. Hence, identifying India’s consumption led problem may need structural mending at other places too.
In conclusion, it can be said that the Budget 2020-21 does look good as a holistic developmental framework with a long term economic vision for the country, but neither does it acknowledge the more pertinent issues at hand, nor does it rid itself from the age old supply-side growth linked bubble. This is where it misses out on the immediate and urgent needs of the economy. This Budget does look at various aspects beginning from economic security to social equity to addressing climate change, but despite the best attempts, there remains a lot to be desired from such a promising premise. The question that still looms large is: will this kickstart the sleeping (definitely not moribund) economy? The answer seems to be in the negative!
This commentary originally appeared in The Edition.
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Dr. Nilanjan Ghosh is a Director at the Observer Research Foundation (ORF), India. In that capacity, he heads two centres at the Foundation, namely, the ...
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Soumya Bhowmick is an Associate Fellow at the Centre for New Economic Diplomacy at the Observer Research Foundation. His research focuses on sustainable development and ...
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