Conventional thinking at work
Subir Roy
Senior economic analyst
STOCKBROKERS are no economists and they often get their economics wrong. But what they reflect accurately is sentiment. In response to the Union Budget for 2020-21, the stock market fell the most in 11 years, beaten only by the fall in 2009 when the global financial crisis was raging.
This fall reflects the disappointment within business circles over the absence of a game plan to yank the economy out of the severe slowdown that has gripped it. The disappointment was all the more because of the keen anticipation that had built up for a big-bang Budget. True to itself, the stock market had created value in anticipation of the Budget. So what happened after the Budget was a classical ‘correction’. In fact, economists were earlier bewildered as to why the stock market was so buoyant when the economy was so sharply headed downward.
The Finance Minister has said: Wait for Monday. State-owned institutional investors can prop up the market, but how long can this go on? Soon, LIC, the big daddy among them, can have private shareholders who will not be happy with any operation on non-commercial considerations.
There can indeed be a personal explanation to what has happened. The Budget does not have a grand design because the government does not have in its ranks economists who can think out of the box and are robust enough to devise non-textbook solutions for unusual situations. So what you get is a Budget which is effectively an aggregation of departmental inputs from administrators. In such a situation, you will get a Budget speech which will be too long to read right through.
What business and industry were expecting was a big fiscal stimulus which would give a much-needed boost to slumping consumption demand. In the process, if conventional fiscal conservatism has to be jettisoned, then so be it. But what has happened is that the fiscal balance has not deviated from the beaten track. The Budget projects a fiscal deficit of 3.5 per cent for 2020-21, not terribly out of line with the current year’s deficit of 3.8 per cent, according to the revised estimates.
There is also the by now regular element of extra-Budget borrowings which, if added, will take the real fiscal deficit to 4.5 per cent, according to one estimate. These extra-Budget borrowings, which have come in for wide comment as they devalue the claimed fiscal deficit, could have been officially included and explained that the latest figures are not comparable. But this has not been done.
Where the Budget has met expectations is by giving a boost to capital expenditure. It has marginally exceeded what was projected in the Budget estimate. What is also very reassuring is capital expenditure being slated to go up by 18 per cent in the coming financial year. If automobile companies are disappointed with the Budget, cement companies which benefit from capital expenditure on infrastructure are happy.
The one move which will be widely cheered by corporates is the decision to abolish dividend distribution tax. Corporates will now not pay a tax on the dividend they pay out and it will be up to individual investors to declare their dividend income and pay a tax on it, if necessary.
Overall, what the Budget reflects is conservative or conventional economic thinking under which it looks askance at subsidies. On the face of it, the total subsidy bill (for food, fertilisers and petroleum) has actually gone down in the revised estimates by a good 24 per cent. But there is a catch. Off-Budget borrowing, for example from the National Small Savings Fund, has been roped in to help out. But even if you include this, there will be only a small rise over the Budget estimates.
In keeping with its present ideological moorings, the government has chosen to rely on the private sector, at least in part, for even social sector expenditure. To address the issue of shortage of medical manpower, the government has decided to create teaching colleges with all district-level hospitals. These will be funded under the public private partnership model.
Another good move that has been announced is to raise fivefold the ceiling on insurance of bank deposits from Rs 1 lakh to Rs 5 lakh. The need for this was palpable when the Punjab Maharashtra Cooperative Bank ran into trouble and long queues of worried depositors seeking to withdraw their money formed before its offices. But even this is not enough and only covers the inflation that has taken place since 1993 when the limit was last fixed. In these decades, per capital income has gone up and India compares poorly with the level of deposit insurance as a proportion of per capital income, compared to say a country like Brazil.
A big selling point of the Budget with the middle class is the sizeable cut in income tax rates for annual income up to Rs 10 lakh. But this has turned out to be a googly. There is a choice. Those who opt for the new lower rates will have to forego the benefits of most of the current deductions and exemptions. So the net benefits will depend on the extent to which a person has been taking advantage of existing deductions and exemptions.
There is a further catch. If you opt for the new regime, you cannot go back to the old one even if changes in a subsequent Budget make the old regime attractive again. Also, remaining under the old regime is fine, but how long will it remain unaltered? Besides, if you have additional income from a business then things get even more complicated. It would have been far simpler if the government had lowered tax rates and removed exemptions without leaving the old window open.
