Union Budget 2020: Dangers ahead

While Budget 2020 was expected to bring back the Indian economy back on track, days after Nirmala Sitharaman’s longest Budget speech ever, key stake holders have been left wondering: how could a government get its direction so wrong?

The Budget is essentially a continuation of the government’s policy push towards manufacturing and government investment driven growth model which has pushed large parts of our population into deep distress. The Finance Minister may seek solace and approval from the stock markets to feel that she has done a good job, but this is a part of the problem and not the solution. What this means is that while money would continue to be made in the stock-markets, there would be very little in it for the bottom 70% of the population.

We have reached a point where consumption is falling and people on the margins are being pushed back into poverty. The doctor’s prescription for the Indian economy was straight forward; improve consumption, put more money in the hands of the people and let the process of bottom-up growth heal the economy. Instead, the government has cut MGNREGA funds, kept allocations for PM Kisan at the same level as last year and hit the FCI’s fiscal ability to buy from the farmer. There is more trouble for the states as their fiscal space is going to reduce dramatically over the next year.

There is already evidence of distress building up in the states as the government has made massive cuts in outgo to states.

In the case of Telangana, the total share was Rs 19,718 crore which has been reduced to Rs 15,987 crore in the revised estimates. This would mean that states would have to cut expenditure on their schemes or seek permission from the Centre to borrow more, pushing states into deeper distress.

At the core of the Budget lies how the government is planning its finances and how it would play out over the next fiscal. The government’s fiscal math is hanging by a thread and its ability to keep the deficit at 3.5% of the GDP would depend almost completely on how it goes about selling government assets worth more than Rs 2 lakh crore. This is roughly equal to the fiscal impact of reduction in Corporate Tax rates and this year’s proposed Income Tax cuts.

The discussion on the budget has so far been limited to trying to make sense out of the new Income Tax rates announced by the government and what kind of impact it would have on middle caste household budgets.

The topline figures suggest that the government would lose around Rs 40,000 crore in revenue due to the tax cuts, that is if people actually shift to the new tax regime. The impact on the economy has so far received limited media attention.

Everything on the budget indicates that the government has stopped thinking about people and there could be no greater manifestation of this than the reduction in MGNREGA budgets, which were slashed from Rs 71,000.81 crore to Rs 61,500 crore.

This comes at a time when agriculture is growing at just about 2% and unemployment is at a 45-year high. While MGNREGA may not be the most desired form of employment, it is the last resort for millions of Indians who cannot find any other work.

The Budget is also going to hit the agriculture sector really hard.

Data from Q2 of 2019-20 estimated agriculture growth at 2.1% and while agricultural-output was high, most crops were selling between 10-37% lower than the MSP.

If the government was serious about raising agricultural income, it would have allocated more resources to the Food Corporation of India (FCI) and allowed them to buy more from the farmers at higher rates.

Yet the government has reduced the food subsidy bill from Rs 1.84 lakh crore to Rs 1.08 lakh crore plus putting additional burden on the FCI to borrow more from National Small Savings Fund to bridge the funding gap. Reduced buying by the FCI could push prices down further and add to the rural distress.

The question is how this would impact the agricultural sector and the overall rural economy?

NSSO data had indicated that rural consumption has been on the decline over the last several years and there is nothing in the budget that indicates that this is going to pick up in the next financial year. Doubling of farm income would now need a 15% growth per annum, which is almost five times the 3% growth achieved in the first five years of the Modi government. The rise in incomes of agricultural workers has been way below the 3%.

Budget proposals put forward by the government give no hope for the 59% who are employed in agriculture and millions of others in rural areas and small towns who depend on rural prosperity and demand to stay afloat. It would be improper to expect that new jobs are going to be created in the informal sector.

The government hopes to create growth based on manufacturing/ assembling for the world, but it perhaps does not factor in global growth projections made in its own economic survey.

“The World Economic Outlook (WEO) Update of January 2020 published by IMF has estimated the global output to grow at 2.9 per cent in 2019, declining from 3.6 per cent in 2018 and 3.8 per cent in 2017. The global output growth in 2019 is estimated to be the slowest since the global financial crisis of 2009, arising from a geographically broad-based decline in manufacturing activity and trade,” the Economic Survey states.

In addition to this, the Economic Survey also indicates that in the hey-days of the Modi government, it managed to generate only about five lakh jobs per annum. “Between 2014-15 and 2017-18, total number of workers increased by 14.7 lakh and total persons engaged increased by 17.3 lakh, in the organised manufacturing sector in India,” the Economic Survey stated.

The Indian economy needs to clear about 1.2 crore jobs a year and on its best day, the formal sector generated about 5 lakh jobs and a large number of these jobs have been lost over the last two years, mainly due to a consumption slowdown.

We now face a situation where we can expect some demand revival in middle class consumption, because of the tax cuts and assuming that incomes are not reduced due to a slowdown in demand, but we are staring at a further cut in rural consumption. The magnitude of cut in consumption purely depend on how the prices roll out when the farmer goes sell his winter crop hits the market.

The Economic Survey put growth expectations for the next financial to be between 6-6.5% and hopes that the nominal growth would be around 10%, or 2.5% above the expected nominal growth of 7.5% in 2019-20. But meeting 6% growth expectations would depend on two things how well does consumption bounce back, if at all, and what happens to inflation. The threat of stagflation continues to lurk in the background.

The big concern is if the government is going to meet its revenue collection targets for the year, put optimistically 12% higher than this fiscal, at Rs 24.2 lakh crore. Slowdown pushed down revenue collections from estimates and if revenue collection next year falls below 12%, all the projections by the government will turn awry.

What happens to the Budget and fiscal deficit math if tax collection projects fall short on delivery? That would mean more pain, higher deficits and perhaps a painful downgrading of India.

Let us hope that we are able to avoid that.