Amid Awful Backdrop, Sitharaman’s Ride-on Income and Purchasing Power: Budget 2020

Amid Awful Backdrop, Sitharaman’s Ride-on Income and Purchasing Power: Budget 2020

Shashank Vikram Pratap Singh

Ph.D. Scholar

Department of Commerce

Delhi School of Economics

University of Delhi, 110007.

ssvikrampratap@gmail.com

Amid the historic slowdown in the major sectors of the economy, honourable Finance Minister (FM) Nirmala Sitharaman presented union budget for financial year 2021 (FY21) on 1st February 2020. From agriculture to private investment, almost all sectors have recorded, historical slowdown from the last few quarters. Central Statistical Organisation (CSO) has estimated the overall growth numbers for the financial year 2020 (FY20), which is as follows-

·        GDP growth - 5 percent (lowest in 11 years)

·        Private investment - 5.8 percent (lowest in 7 years)

·        Manufacturing - 2 percent (lowest in 15 years)

·        Agriculture - 2.8% (lowest in 4 years)

Having such terrible backdrop, FM was faced with tough choices like whether to combat with targeted fiscal deficit of 3.3 percent or to stimulate consumption and investment, or to boost confidence of investors, or to revive manufacturing, or to infuse liquidity in the economy, or to enhance expenditure on social securities, or to spur demand in rural economy; or to do whatever that can bring back India's lost glory of the fastest-growing major economy in the world. Looking into the status of India's macroeconomic variables and fiscal arithmetic, the task was quite difficult for FM and her entire team. Either to make excessive government spending to boost demand as suggested by Chief Economic Advisor, Government of India (CEA, GoI) KV Subramaniam in the recent Economic Survey 2019-20 or to keep the fiscal arithmetic in balance, FM left with either of the two macro-economic and fiscal strategies. 

This year (FY21) size of the budget is INR 3.43 lakh Cr more than the revised estimated budget of 2019-20 (FY20). Meaning hereby, the government is going to spend INR 3.43 lakh Cr more in FY21 than what it has planned to spend in FY20. To boost investment, INR 4.12 lakh Cr is kept for capital expenditure (Capex) for FY21 which is INR 63,178 Cr more than the revised estimated amount for FY20. The revenue receipts for FY21 are estimated to INR 20.20 lakh crore which is INR 1.70 lakh Cr more than the revised estimates for FY20. Thus, the fiscal deficit-GDP ratio is estimated to 3.5% for FY21 against revised 3.8% for FY20. Thus, this year's budget conveys a common message- more government expenditure and highly ambitious about net tax revenue of INR 16.35 lakh Cr which is 24.20% more than actual net tax receipts of 2018-19. 

As usual, this year budget too has many lucrative sops without sufficient immediate stimulus to revive growth likes- new optional slab rate (2.5 to 5 lakh-5%; 5 to 7.5 lakh 10%; 7.5 to 10 lakh- 15%; 10 to 12.5 lakh-20%; 12.5 to 15 lakh- 25%; above 15 lakh-30%), abolished dividend distribution tax, 100% tax concession to SWF (sovereign wealth fund), Vivaad se Vishwaas scheme (new direct tax dispute settlement scheme), disinvestment of LIC through IPO, revive domestic manufacturing by raising custom duty on specified imported products, 100% tax deduction for start-ups having turnover of Rs 100Cr, increase the threshold for audit of MSMEs to Rs.5Cr from currently Rs.1Cr, increase deposit insurance to Rs.5 lakhs from Rs.1 lakh, plan to invest over INR 100Cr in infrastructure, external commercial borrowing and FDI in education, 16-point agendas for agriculture, provision for Quantum technologies and many more. 

Seeing the whole set of announcements, it appears that, FM tried to revive the economy through increasing disposable income of salaried class of people and infusing money in the rural economy. Para two of FM’s budget speech also clearly states that “this is the budget to boost income and enhance purchasing power”. Theoretically logic seems unquestionable but at the execution level, it raises few questions. 

Private consumption expenditure constitutes around 60 percent of GDP, and in the second-quarter financial year 2020 (Q2FY20), it grew by 5.06 percent compared to 9.79 percent in the same quarter of the financial year 2019 (FY19). Thus, the logic to boost consumption by slashing personal income tax makes lots of sense keeping in mind propensity to consume is higher at a lower level of income. But its actual effect on the marginal propensity to consume seems to be bleak and not enough to immediately boost consumption. The latest available data reveals that there are 58.7 million total taxpayers in India and relative terms its around 5.70% (58.7/1030 Million) of the total population. Although there are only 18.2 million taxpayers in the income slab between INR 5-15 lakh. Meaning hereby only 1.77% of the total population or around 31% (18.2/58.7 million) of total taxpayers have an option to opt for a new tax regime which is too small to boost the economy like India keeping in mind the power of discretionary expenditure to this particular section of people.

In this budget FM allocated INR 2.83 lakh Cr (Rs 1.63 lakh Cr for agriculture & irrigation and 1.20 lakh Cr for rural development) for agriculture and rural development to realistically achieve the ambitious 16 points agriculture agendas. The fund for Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) reduced by more than 13 percent as compared to the estimated fund of 2019-20. Such reduction is at a time when consumption data is showing downward trends and livelihoods of more than 50 percent of people depend on agriculture.  

 Rural India represents the home of around 800 million people whose purchasing behaviour often linked to farm output. The average monthly per capita consumption expenditure in rural India is around Rs. 1430 and almost 70 percent of the rural population is below the average monthly consumption expenditure. The penetration of the mobile phone, packaged foods, hygiene items in rural and semi-urban India is not as much as it’s there in urban India. Meaning hereby, there is the intense scope of propensity to consume in rural India. Hence the increasing purchasing power by lowering the inflation rate and increasing disposable income of this vulnerable segment may revitalize the economy at an excessively high level. But this budget does not have enough sops that can immediately rejuvenate the consumption expenditure of this particular section of people.

Seeing the budgetary receipt & expenditure capacity and mandatory allocation of funds, FM has certain constraints. As the theme of the budget states “ Sabka Saath, Sabka Vikas, Sabka Vishwas”(Development for all) funds need to be allocated within the stated theme, keeping in mind the limited budget receipts and considerable fiscal deficit-GDP ratio. In the coming time, it will be interesting to see how this budget fulfills the dream of aspirational Indian’s new India through a $5 trillion economy.