Budget 2020: A Budget Of Small Things. Do They Add Up?
A day laborer seeking work waits at Green Valley Chowk junction in Noida, Uttar Pradesh (Photographer: Prashanth Vishwanathan/Bloomberg)  

Budget 2020: A Budget Of Small Things. Do They Add Up?


A day before the Union Budget was presented, GDP growth for fiscal year 2018-19 was revised downward from 6.8 percent to 6.1 percent. This just weeks after the government estimated FY19-20 growth at a measly 5 percent. Consumption is at a several-year low. And the Economic Survey released on Friday, put much of the blame on the beleaguered financial sector.

And yet the Union Budget 2020 presented by Finance Minister Nirmala Sitharaman did nothing substantive to address any of these big issues.

Instead, over 3 hours, the longest budget presentation to date, Sitharaman listed more than 50-pages-worth of small things. Her audience of citizens, even the expert ones, struggled to connect the dots.

“It is very difficult to assess at this point in time. There are so many little things,” Arundhati Bhattacharya, former chairman of the State Bank of India, told BloombergQuint. “But if you were looking for those big bold things that would quickly release animal spirits, I don’t think I see that yet.”

Ananth Narayan, professor at S. P. Jain Institute of Management and Research, concurred, “We have seen some small things but don’t really see a big picture there.”

Saurabh Mukherjea, founder of Marcellus Investment Managers, put some of the disappointment down to unreal expectations. “A lot of people in our country built up unrealistic expectations ever since the corporate tax rate cuts. After the rate cuts, the expectation was that couple of rabbits will be pulled out of the hat. And quite rightly, the finance minister said there are no rabbits to be pulled out to be enjoyed today.”

Sure there were some big announcements in the budget — an alternate income tax regime with lower rates and no exemptions, the scrapping of dividend distribution tax, a fivefold increase in bank deposit insurance and the decision to divest prized public sector possession Life Insurance Corporation of India.

One or two big things stand out, Bhattacharya said. “For instance LIC divestment is a very big thing. Anyone in the finance sector, that will stare them in the eye. It’s in the right direction. I congratulate the government for taking such a step. The second thing is the Rs 5-lakh deposit insurance. But along with the Rs 5-lakh deposit insurance, depositors should also be aware that this will mean paying off much larger premiums by the bank. And therefore, the cost of servicing accounts will rise accordingly.”

These are steps in the right direction but not enough to spur growth.

“This budget is an acknowledgement that the fiscal numbers are not looking great. The half percentage escape clause is the maximum that’s allowed. The numbers which came for December tax collections indicate that the problem is much bigger than that,” Narayan told BloombergQuint. “We are probably looking at 1.5 percent of the GDP as the actual slippage.”

The reality is that the fiscal space available for doing anything big was just not there, he said. “There were some people hoping for a demand stimulus of some kind. But given the fact that the fiscal space is simply not there, there was very little room for that. Second, (there) was some hope that you might see some thrust on infrastructure, investments which was a thrust area last year. It is a tough time to do infrastructure and investments when capacity utilisation is very low.” The fiscal situation was “really stretched” Narayan emphasised. “While the half percent escape clause is exercised, the actual number can be much larger. So, we are looking at a real problem on the fiscal side beyond what the (FRBM) act allows now.”

With the benchmark indices down 2.5 percent, India’s equity markets logged their worst budget day in 11 years. Though foreign portfolio investors may soon have appetite for select companies, Mukherjea said.

“I do believe that the FMCG boost, courtesy the modest tax cuts and the DDT abolishment, we will see FPI action juice up those stocks. To abolish DDT is a big deal. You are changing capital allocation imperatives for highly cash generative companies like ITC or Nestle. I think we will see the benefits of that come through next week. There are no demand boosters structurally. (The) financial situation is challenged. And if you step back and see what this is doing to our country, year after year, is that we are pushing the economy to companies which have substantial internal accruals who can fund the growth. And if you can’t fund your growth, God help you. That’s skewing the economy into the hands of highly cash generative market leaders. It is throwing everybody else onto the wayside. And economic growth in our country is becoming a highly polarised affair. That’s the way it will be for a few years. The quicker we realise that and stop having unrealistic expectations of the government, the better it would be.”

Won’t this polarisation only further limit future economic growth prospects?

“That is the mood in the nation at this point in time,” said Bhattacharya who ran India’s largest lender for four years. Citing the example of Reliance Industries Ltd., she said, even the largest company in India wants to become debt-free. “So if a company of that size can’t afford debt, then who can? Yet, you cannot really improve the lives of people unless you allow them to leverage. It’s a basic principle. Even with respect to small households in rural areas, we ask them to save for six months and then on the basis of the savings we allow them to leverage. Because that’s the way of quickly getting to a standard of living. Which will then enhance your income so that you can then repay those loans. We have to understand that this is the mood at this point in time. Which is why we need to bring back confidence. Which is why you need to bring back trust. Confidence and trust are what allows you to leverage. If you don’t have confidence and trust you won’t leverage.”

But she remains confident that even sans government stimulus growth will eventually bounce back. “It always does. If there are no external stimuli, it will take longer. But it will emerge. Because at the end of the day demand overtakes everything,” she said. “The fact of the matter is at what point of time will it emerge? Do you want it faster or slower? If you want it faster then you bring those external stimuli to hasten the process. At this point, that is not coming through.”

Watch | Arundhati Bhattacharya, Ananth Narayan and Saurabh Mukherjea discuss whether the budget has done enough.

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