Will Budget 2020 Work In Getting The Indian Economy Back on Track? - Editorial

Background Context

The Union Budget of India is the nations’ all-inclusive Annual Financial Statement.

The Union Budget is the detailed assessment and statements of the account of the government’s finances, its revenues from various streams, and spending to be induced on varied activities that it'll incur.

According to the Article 112 of the Indian Constitution, the Centre (Union Govt.) lays a press release of its estimated gains and expected expenditure for that year, From April 1, 2020, to March 31, 2020, to both the houses (lower and upper houses) of Parliament.

Photo by Kelly Sikkema / Unsplash

Finance Minister has an undesirable and thankless task ahead as she rises to put forward the Union Budget for the fiscal year 2020-21 (FY21).

That’s because the Indian economy has been slowing down at a considerable pace, the govt cut short the GDP rate of growth for 2018-2019 from the existing 6.8% to the new 6.1%. Economists and financial analysts say the growth rate of the current year is already estimated to be at a six-year low.

What is the matter with the economy?

Broadly, there are four wheels that facilitate and drive, the GDP growth in an Indian economy. These four crucial wheels are …

  • Consumption power of the private individual - Private Consumption (C)
  • Demands for inventories from the government - Govt. Spending (G)
  • Corporate Investments from potential businesses - Investments (I)
  • The net stipulation from export and imports - Net Export (NX)

Sum of all these four factors, together can be termed as GDP …

GDP = C+G+I+NX

Unfortunately, with each year, the Indian economy is losing its wheels of growth …

The third wheel, Corporate Investments from potential businesses (I) has seen a steady and sharp decline since 2011.

The new business discovered the fact, that the national financers to the Indian economy, (i.e. National Banks of the public sector), responsible for major lending (70% to 80% of total lending) were new struggling with non-performing assets.

Photo by Avinash Kumar / Unsplash
  • A big share of these non-performing assets (NPAs) were the corporate loans that they had lent to the large businesses that were now injured and crippled.
  • Private consumption demand was the first and heavily affected rural India with penurious commodity prices.
  • While this signifies or denotes that retail inflation was in check or in control, the purchasing power of farmers declined.
  • This weakness in rural demand was aggravated by a decrease in urban demand after the credit stream from the non-banking financial sector organizations or companies halted following the meltdown in IL&FS.
  • This is being witnessed within the sales fall (collapse) across the board - from automobiles (cars) to Fast Moving Consumer Goods - FMCG (shampoo sachets).
  • Government demand sustained the situation for a substantial time. But with a pointy fall in revenues, because of slowing growth, can’t expect the govt can spend without major defy and going against the Fiscal Responsibility and Budget Management (FRBM) Act targets.
Photo by Syed Hussaini / Unsplash

What were the choices before the government?

  1. Private consumption (C): accounts for approximately 57% of the total GDP.
  2. Private and Corporate Investments (I): is the second big chunk, which accounts for approximately 32%.
  3. Government spending (G): is the least or negligible contributor, with net exports (NX) statistic being almost in the negative zone for India.
  4. Under normal situations, it should be the ideal course of action for the government to extend or increase its expenditure and thereby provide a robust growth stimulation to the economy. Govt spending is the direct contributor (directly linked) to someone’s income.
  5. This income generated from the government spending, when spent again by the end consumer, say on buying an automobile (car or bike) or an FMCG (bar of soap), produces more economic transactions and activity, and further incomes. It is a cyclic process.
  6. In the walkthrough of the Budget, many including scholars had insisted that very often this should be the obvious and ideal course of action for government. But these aren't “normal” situations.
  7. A sedated and slow-moving economy has agitated the government’s tax collection and revenue. As such, because the nominal GDP increased by only 7.5 percent in 2019-20 against the forecasted growth of 12 percent, the gross tax revenues of the govt had a massive decline from ₹ 24,61,195 crore to ₹ 21,63,423 crore that's a deficit of ₹ 3,00,000 crore.
  8. The Government could have borrowed extra cash from the market, but here too there was a drag and shortfall of required supply.
  9. In simple understandable terms, there weren’t enough financial provisions and savings within the market to fuel and accelerate the government demand.
  10. As a result, the complete expenditure of the government is hammered and can only climb up maximum up to 9% over FY20’s budgeted figure.
  11. The other possible alternative or intended action was to magnify investments.
  12. To a certain stretch or extent, the government had already tried this option, but outside the Budget, when it publicized a pointy cut in corporate tax in the previous year.
  13. This activity of “Tax Cut” cost the Indian government, approximately ₹1,50,000 crore (₹1.5 lakh crore) in 2019-2020, with little or no data to show in terms of the latest and new investment activity.

Private Consumption demand needs more Investments

  1. To be certain, investment decisions aren't taken during a hurried circumstance and albeit (although) the company tax cut was a welcome verdict, and the one forecasted to benefit the Indian economy in the medium to near future, at the present, in the immediate term, it's been inefficient and incompetent.
  2. That is because investments are directly proportional to consumer demand, and consumer demand has been steadily declining. As a result, a large number of high unsold finished products and goods, and is seen in capacity utilization falling to a rock bottom late last year.
  3. However, the Minister of Finance declared that there'll soon be a scheme to promote and encourage investments in the manufacturing & production of mobile phones, needed equipment, and semiconductor packaging and storage.
  4. Similarly, the Finance Minister has also, allowed the electric power generating organizations to benefit from the company tax cut.
  5. The Private Consumption (C) demand and by looking at the situation or overview of it, the government has tried its best to poke and ask people to consume more and, in that way, kickstart a righteous and unimpeachable cycle.
  6. The government tried this option “Encourage Private Consumption” by providing people with some options that magnify their disposable income. However, in the process, it has deterred private savings.
  7. An ideal example of this is often the choice of a “Fresh New Tax Regime”, which removes all exclusion (immunity) and discounting but also introduces the fresh new cuts to the tax rates.
  8. The government thinks that taxpayers are going to be joyous and interested to choose the new structure because it's likely to fill their pockets with extra cash savings.
  9. These government assumptions are likely to be very true and favorable for those taxpayers who are young and fall near the lower end of the income brackets or slab.
  10. That is since, therein age and income brackets, the supposed “marginal tendency or inclination to consume is higher”. The richer and fat-salaried workers tend to save a major portion of their income.

How does the govt look forward to this strategy working?

The government’s strategy, or hope at a minimum, is that leaving people with extra money or cash in their pocket, will enable and encourage their consumption levels, which are at the present quite defeated, as seen in the dip in sales of consumer goods, products and services across the board.

More consumption will bring downloads of products and goods in the economy that is currently sitting on the shelves of the stores and incentivize businesses to take an investing position again.

The platform has been created to form investments lucrative for businesses because the government has already cut down the corporate rate, a year earlier.

Once the commercial activity revamps, the govt would have more taxes revenue at its disposal and would be in a healthy situation in the coming years to spend more productively and fruitfully.

What are the Major five things to observe in the Union Budget 2020?

Nominal GDP growth

This is the foremost crucial number during a Budget and it forms the spine of all other variables attached.

The full Budget was presented by the center in July 2019, with expectations of nominal GDP to grow by 12% in 2019-20. In reality, the real number is probably going to be 7.5% or maybe even lower.

This dip or sink completely stirs the probable, real GDP for 2019-2020; real GDP is extracted after deducting the annual inflation (approximately 4% for the year) from nominal GDP.

Fiscal and Revenue Shortfall (Deficit)

Given that there are not any driving forces of growth and prosperity left within the economy, many have disputed that the government must not lay back struggling from the fiscal hawks, and instead must spend more to revamp the general demand and rejuvenate the animal spirits in the economy.

However, an important thing, if the govt decides to procrastinate fiscal responsibility protocols, would be if the govt concentrates on revenue deficit as well.

In 2018, the center had stopped focusing on revenue deficits. This had meant that India repeatedly borrowed finance to monetize its everyday consumption at the heavy price of funding capital expenditure.

To put it in perspective, ₹100 spent on capital expenditure by the Indian government, leads to the sum of ₹250 being attached to the overall economy, this is a costly overhead.

Instead, If the government decides to spend or disburses on revenue like salaries the overall effect and influence on the economy is lower than ₹ 100, sounds impressive.

So, the crucial thing isn't if the fiscal deficit focus is scorn or not, the crucial thing is what's the revenue shortfall (deficit) and whether the government plans to minimize it to 0% in the near future or next few years.

The TAX cut

Primarily there are two major reasons, the government is considering an option to cut the personal tax rates or at least rearrange its slabs.

  • Firstly, the corporate income tax rates are chopped aggressively or sharply last year. It justifies the ease to the taxpayers in the economy.
  • Secondly, people are eagerly expecting the tax cut for the long term, and either way good solution to reduce the long-awaited concerns of the middle class in India.


Disinvestment Targets

The Prime Minister has been recapitulating, that the nation cannot proceed without people start looking “wealth creators” with great respect.

The Economic assessment has already configured the framework and policies that require to be improved and tweaked.

An ideal situation for the government to get out of the way of business in the nation, and magnify significant resources of its own in the process. This can be achieved by diversifying its potential investments into the wide influx of public sector organizations.

A good way for the govt to urge out of the way of companies within the country, and lift significant resources of its own within the process, is by divesting its stake in many public sector enterprises.

Conclusion

Union Budget also strengthens government to work upon its constitutional responsibilities like providing social fairness & justice and impartiality (equality) for all.

Rightful resource allocation and distribution and in the best interest of the nation and allocating resources optimally (to most desirable entities) for public welfare.

It is the urgent need of a time, Union Budget got to take steps to control inflation & deflation and economic hiccups thus ensuring economic equilibrium and financial wellness in the country. The Union Budget of any nation is the most important decision because it has ubiquitous implications on the nation's economic stability.