The Budget of Promises and the Impact on Indian Economy (Part II)

Indian economy has been manifesting the signs of a severe slow down for some time now. It is a known fact that the budgetary provisions can be used as an effective tool to counter the recessionary trends. However, the major provisions related to fiscal interventions through taxation and infrastructural spending have not been in sufficient volumes to save the economy from the dangers awaited. The dip in the overall growth rate has come as a big disappointment to the Government officials as well as the policy makers. This article attempts to see the major tax and public spending related measures in the budget 2019 and the short and long run tremors in the economy. It also makes an attempt to suggest policy measures that could reduce the negative consequences to the minimum.

Budget 2019 and Major Tax Provisions

The tax policies are always introduced by way of adjusting direct and indirect taxes. In the case of the former, the impact and incidence of the tax fall on the same person where as in the case of the latter they fall on different people or entities. The budget 2019, as is clear, was not flooded with tax concessions and bounties, though it was expected to be so by different segments of the society. In this context, it is worth mentioning that the provisions specified in the interim budget had been retained along with some new measures added.

Direct Taxes – Major Provisions

Regarding direct taxes, the tax rates and slabs have been left without significant interventions. However, the government has pinched the super-rich, with income between Rs. 2 to 5 crore. In similar lines people with income above Rs. 5 crore are gifted with an additional tax burden. The individuals with annual income less than Rs. 5 lakh continue to be kept out of the tax net. This reflects the redistributive orientation of the government by increasing the tax burden of the rich in order to ensure more welfare schemes for the poor. The government has also made the investments in National Pension System tax beneficial. As per the new provision, the investors are allowed to withdraw 60 percent of the corpus as lump-sum amount and 40 percent for the compulsory purchase of annuity plans. The government employees investing in the National Pension System (NPS) are assured with complete claim of tax benefits. This would definitely encourage people to save which in turn will carry a direct impact on the productive segments of the economy through the spurt in investments. Further, an additional deduction of Rs. 1.5 lakh, granted on interest paid on home loans under a new section aims at facilitating affordable housing. This is obviously part of government’s step towards increasing the ease of living in the country. The decision to extend the tax system to the non-resident Indians (NRIs) receiving gifts from Indian residents would ensure the expansion of the tax base and preventing the possibility of tax evasion through this route. In addition, the government has relaxed the burden on the salaried class and pensioners by hiking the standard deduction by Rs. 10,000 from the existing Rs. 40,000 which implies an increase in the saving of all sections earning annual income above Rs. 5 lakh.

Indirect Taxes – Major Provisions

There are certain radical changes in the budget in the indirect tax front. For instance, look at the allocation of Rs. 350 crore to support the 2 percent interest subvention. Providing interest subvention for certain groups would actually ensure cheaper credits and raise the aggregate demand through the rise in expenditure of these groups. Sabka Vishwas Legacy Dispute Resolution Scheme is introduced to resolve the issues raised in the field of central excise and service tax regime. This can bring forth the resolution of disputes quicker and in turn make the process more efficient. The increase in the price of petrol and diesel by Rs. 1 through the Special Additional Excise Duty and Road Infrastructure Cess has been taken with bagful questions by different sections. The withdrawal of customs duty for commodities like cashew kernels, tiles, PVCs, marble slabs etc. and specific electronic items manufactured in India, might have far reaching effects. Also, the increase in customs duty on gold and precious metals would add more revenue to the exchequer. At the same time, the reduction in customs duty on goods of medical and capital requirement including the inputs for artificial kidney and disposable sterilised dialyser, fuels for nuclear power and capital goods for manufacturing electronic goods would support the sector for faster recovery. Also, there are attempts to regulate the nature of the commodities imported and exported in the short-term. However, the effect of such a change on the balance of payments position of the country is not very substantial.

The benefits of the above discussed tax measures can only be understood with time since the short-term impacts may not be sustained over the long period. The support given to the corporate sector and start-ups can be regarded as strong measures to revive the ailing business sector, but it has created an impression that other segments have conveniently been forgotten. Again, tax related measures aim at ensuring redistributive justice in terms of income among different sections. Nevertheless, the benefits of such intended redistribution would be vivid only if the policy is sustained for a long period. The government has made it mandatory for the citizens to file income tax returns which undoubtedly signs government’s commitment to expand the tax base. Further, the government kept the income tax slabs unchanged although reforms in those lines were widely anticipated. As a matter of fact, it is the most needed time to strengthen the purchasing power of the lower and middle-income groups since they are the worst-hit section during an economic downturn. Thus, the silence and delay on the part of the government in implementing tax reforms in these lines may cost the economy heavily in the future.

Infrastructural Allocations and the Need for Heavy Injections

The spending on infrastructure is a very crucial aspect of the fiscal interventions by the government. The Union Budget 2019 has earmarked significant allocations for economic and social infrastructure. The budget has proposed an allocation of Rs.100 lakh crore for undertaking and completing various infrastructural projects and schemes underlining its mission to build a new India through proper connectivity, accessibility and affordability. The target of making India a US$5 trillion economy is truly ambitious within the stipulated time frame, but not impossible if we can aim at achieving high growth rate through the schemes of sustained infrastructural development and inclusive growth. In this regard, the budget allocation of Rs 70,000 crore for bank recapitalisation and funds for fresh Public Sector

Undertakings [PSUs] could be a great impetus for the banking sector which would generate more funds and credits. The Pradhan Mantri Gram Sadak Yojana (PMGSY) scheme, proposed to attract industrial investment in catchment area by providing proper connectivity and other industry related structural facilities, would definitely improve connectivity by facilitating easy access and more efficiency of logistics. The budget has made specific provisions for enhancing road and inland waterways’ networks under Bharatmala and Janvas Vikas schemes respectively. With regard to public transport, provisions have been made to increase the total capital outlay of railways to bring in private-public partnership. Also, the government has set aside wide range of infrastructural as well as investment schemes pertaining to the aviation industry. The Udaan Scheme was introduced by the government during the period of 2014-19 to bridge the rural-urban divide. With an intent to achieve self-reliance in the aviation industry, the government announced its interest in aircraft financing than leveraging. The government also introduced various provisions and allocations so as to encourage the use of environment friendly electric vehicles. The budget also provides certain tax consideration in the field of related investments. The shift towards electric vehicles represents an acknowledgement of climate change and the need for sustainable technology.

The Pradhan Mantri Awas Yojana proposes to complete the housing scheme of Modi government by 2022. The Finance Minister plans the construction 1.95 crore houses for the rural and required population with necessary amenities like toilet, LPG and proper power supply. Pradhan Mantri Gramin Digital Saksharta Abhiyan (PMGDSA) aims to digitally educate 2.4 crore rural population by providing assistance through Universal Education Scheme. The budget under the umbrella of Grameen India or Rural India, have made allocations through Ujwala Scheme and Kissan Yojana to provide for more than 7 crore gas connection facilities for the rural India. Thus, the government aims to cover the entire rural India, where none of the houses will be left without proper electricity or clean water facilities by 2022 which also marks the 75th year of Indian Independence. The Finance Minister addressed to the ‘Swatch Bharat’ as a ‘noble scheme’, which resulted in the construction of 9.6 crore toilets and more than 5 villages are made free of open defecation.

Of course, such a strong boost in public spending has been the need of the hour. As the economy passes through the danger of a slow-down which could turn into ferocious shape, it is of paramount importance to identify the priority sectors and allocate the optimum share of pie among each one of them. An important policy paralysis noticed in this context is the absence of strong measures to strengthen the rural purchasing power. Unless there are effective policies to deal with rural distress that has further weakened the agricultural sector, many of the policies devised to target inclusive growth will merely be self-defeating exercises.

Macroeconomic Policies – Fiscal Stimulus and Monetary Injection

Macroeconomic policy, in a broad sense, refers to monetary and fiscal measures. The government and the Central Bank use them as weapons in fighting economic fluctuations. These policies aim at controlling the level of Aggregate Demand through influencing the purchasing power and liquidity conditions. For instance, fiscal measures in terms of government spending, borrowing and taxation influence the macroeconomic variables like aggregate demand, aggregate supply, domestic saving, investment and so on where as monetary policy affect target variables like money supply, money demand, credit supply and so on. In other words, the effect of fiscal measures on the aggregate demand is direct and of monetary policy is indirect in nature. It implies that both of them influence the purchasing power of people and the level of aggregate demand.

The signs of a severe slow-down are clearly visible in various segments of Indian economy. They are manifested in terms of fall in the investment activity, tighter funding conditions, a decline in consumer confidence, high real interest rates and so on. In these situations, the government should boost the investors’ confidence through hike in public expenditure, external borrowing and reduction in tax rates. The overall sluggishness leads to decline in GDP and employment growth rates. Most of the key sectors including automobiles, pharmaceuticals, real estate and so on catch the tail end of slowdown in no time.

An Early Review of Budget and Post-Budget Policies

Although the government policies following the union budget seem to be in the right direction, there are some questions and concerns loom around them. By opting monetary and fiscal measures simultaneously the government has reaffirmed its trust in the ‘combination policy’ for ensuring the economic stability. The determination of the government to reduce the cost of capital through successive reduction in policy rates can be regarded as a positive step in raising the liquidity condition. However, the revival of low level of business confidence in the economy may be more difficult and time consuming than one can imagine. The successive doses of public investment as announced by the Finance Minister reveal the commitment of the government on the one side and the toughness of the situation on the other. It is a time when the supply side needs to be strengthened at a faster rate keeping the demand side powerful enough. The decisions to slash the corporate tax rate and to increase the allocation for MNREGA in order to account for inflation are good moves in this direction. The weaker demand in some of the prominent sectors like automobiles can produce deepening impact with long-lasting effects in the economy. In this context, the government measures taken so far, which are more conventional in nature, don’t seem to be highly effective in lifting the economy in the near future with anti-recessionary outcomes. Instead, more doses of sector-specific spending may have better results with immediate effect.

It is imperative to say that the government’s priority should lie in generating adequate income or employment along with successive doses of monetary and fiscal injections. Although the government has made some attempts in these directions so far, one has to admit the fact that it is not sufficient in ensuring a speedy recovery from the slow-down. The issues are multi-faceted as all the macroeconomic variables exhibit similar downtrends. Unless the government and the policy makers come up with more concerted measures, the short-term tremors felt in the economy can be more aggressive, devastating and long-lasting in nature. Such a situation will definitely raise serious concerns about the growth prospects and sustainability of the economy in the near future.

Contributed by-

Dr. Joshy K J – Associate Professor and Head, Department of Economics, CHRIST (Deemed to be University), Bangalore.

Swetha L – Masters’ student in Applied Economics, Department of Economics, CHRIST (Deemed to be University), Bangalore.

Amalu Joseph – Masters’ student in Applied Economics, Department of Economics, CHRIST (Deemed to be University), Bangalore.

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