The Budget of Promises and Its Impact on the Indian Economy – Part I

The union budget 2019, announced by the Finance Minister (FM) of India, Ms. Nirmala Sitharaman, was essentially a bag full of promises. It was presented at the backdrop of government’s intention to establish itself as a performing government thereby creating strong centre-state dynamics, promoting federalism and creation of new India. It was indeed a highly visionary and object-oriented budget with a prior focus on transforming India into a US$ 5 trillion economy by 2025. With the objective statement of mission to the creation of ‘Mazboot Nagarik to Mazboot Desi’, the FM has put forward the Ten Point Agenda of operation, with various socio-economic, political and environmental dimensions in mind. This includes policies related to the creation of social infrastructure, controlling pollution, support for MSMEs, start-ups and automobiles through Make in India Project, water and water management, Clean India, health and education and so on. The Union Budget 2019 has specified huge sum of allocation for infrastructural development and scientific progress like creation of new road networks and the completion of existing projects, investment in aviation industry as well as positioning India in the domain of space power and innovations in similar lines. To quote the FM, the second Modi government aims at achieving the definite goal of becoming a ‘minimum government with maximum governance’. However, the glorious picture drawn has,of late, been marred with the harsh realities and challenges emerged on various fronts including the falling growth rates, mounting unemployment projections and other signs of further slow down across various sectors etc. These aggravating issues have raised serious concerns about the effectiveness of the budget provisions, their sustenance and long term impacts. The article looks into the major provisions across the most crucial sectors and the short terms tremors appeared, probing further into their possible long run impacts.

Agricultural Sector- Call for greater push amidst continuing distress

Although the FM announced the historic allocation of Rs. 1,30,485 crore, which is the highest allocation for agricultural sector in the history of budgetary provisions so far, it has failed in generating the immediate push effect in the economy. This was again a 140 percent increase over the 2018-19 budget allocation with the PradhanMantriKisanSammanNidhi (PM-Kisan) receiving the highest allocation of Rs 75,000 crore. The subsidy allocation of Rs. 79,990 crore aimed at reducing the dependency on fertilizer under the ‘Zero Budget Farming’ project. Further, the interim budget allocation for the PradhanMantriKrishiSinchaiYojana (PMKSY) scheme had been retained at Rs. 3,500 crore. The purpose behind the introduction of the new scheme called the Pradhan Mantri Matsya Sampada Yojana with an allocation of Rs. 805 crore was to increase the production and the productivity by enhancing post-harvest management and quality of the fisheries department. Also, the newly embarked Ministry of Fisheries, Animal Husbandry and Dairying was provided with an allocation of Rs. 3,737 crores. The cluster arrangement in the traditional industries segment, the Scheme of Fund for Upgradation and Regeneration of Traditional Industries (SFURTI), is aimed at providing job opportunities and credits for artisans and cottage activities like Bamboo, Honey collection and Khadi cluster. The focus was also directed in creating 10000 Farm Producer Organisations (FPO) so as to increase economies of scale in few years. Further, the budget proposed for creating 80 livelihood business incubators (LBIs) and 20 technology business incubators (TBIs) for stimulating skill development in the agro-rural industry sector.

However, these provisions for rural and agricultural sector were disappointing to some extent for the simple reason that they would not be sufficient to ensure the necessary fillip required to uplift the sector from the deep crisis it is into. It was a time when both rural demand and rural savings needed a huge push together in such a way that both the demand and supply side get a simultaneous positive impact. The proportion of rural saving to total domestic saving is still very small, leaving this segment with much of untapped potential. However, any surge in the level of rural saving will boost the scope real investment in the economy which in turn can strengthen the aggregate supply. On the other hand, since the marginal propensity to consume (MPC) of the rural sector remains higher than the urban counterpart, any increase in the income will have a proportionately larger impact on the demand side than that of savings or supply. In this scenario, any move in terms of direct transfer of income towards rural sector will onlyhave a short term impact on consumption rather than any increase in the real productive capacity of the economy. Another major area is the assurance of stable prices for agricultural products to farmers which has been a long standing concern for many years.The interim budget, announced prior to elections, had a better and clearer focus on farm and rural sector which undoubtedlywas missing in the full budget few months later.

Manufacturing Sector and the Bleak Future

The Union Budget 2019 can well be regarded as pro-MSME with an all-time high allocation of Rs 7,011.29crore, 6.69 percent higher than the previous year’s. The MSME sector has been allocated with Rs 350 under the Interest Subvention Scheme and for a 2 percent interest subvention for all GST registered MSMEs to avail fresh and incremental loans. The ministry proposes to create a platform for the easy payment of bills and funds under the GST regime. Under a new Scheme called the PradhanMantriKaram Yogi Maandhan, the government plans to expand the pension benefits to more than three lakh small shopkeepers and retail traders with annual turnover less than Rs 1.5 crore. Undertakings of Micro, Small and Medium enterprises are planned to be included in the ‘Make in India’ Project to give boost to this sector. The Scheme of Fund for Upgradation and Regeneration of Traditional Industries’ (SFURTI) is another initiative to uplift the small and micro enterprises by reviving village and traditional industries. MSMEs being one of the most damaged sectors under the twin policy changes of demonetization and Goods and Services Tax (GST), the government has shown special interest towards this sector through higher budget allocation to sustain these enterprises. The budget also made provisions for complete refund of all the unrebated central and state taxes. Further, the government is planning to give quick and instant credit by providing loans up to Rs. 1 crore though an online portal within 59 minutes. The budget has a well envisaged agenda for electric vehicles through incentives and credit support. An incentive-based tax system was proposed to attract huge investment for making India a global manufacturing hub for Semiconductor Fabrication, Solar PV, Electronics, etc. Further, specialised skill-based innovations like Robotics, Innovations and training have also been encouraged through the budget. The government also proposes higher share of foreign investment with a vision to attract high-tech industries to India for large scale operations.

In a deeper analysis, it is very evident that the trends of economic slow down that has surfaced India for some time, has taken its uglier shape within the short span following the budget. The dip in the sales of sectors like automobiles and pharmaceuticals is a growing concern from not only from the aggregate spending front but from the employment generation as well. The decline in the export growth remains another worry as it can create a dent on the long term growth prospects of the economy. The mounting pressure on the Indian currency can have more adverse consequences side by side.

Banking, Finance, Stock Markets and Effects of Cyclical Waves

As per the opinion of FM, the banking and finance sector has performed remarkably wellduring the last year. The NPAs were reduced by over 1 lakh crore and a record recovery of over Rs 4 lakh crore had beenachieved. Under the present budget, the government allocated Rs 70,000 crore to boost credits in PSBs. The government plans to create regulation for strengthening the regulatory authority of RBI over NBFCs as well as for creating a Debenture Redemption Reserve for allowing the NBFCs to raise more funds. The aim is to inject adequate liquidity into the economy in the context of the crunch that the sector has been experiencing in recent years. This measure is expected to encourage lending and eventually boost investment in the economy. The disinvestment receipts target Rs. 1,05,000 for the FY 2019-20 and the government plans to initiate the disinvestment procedures over various crucial segments such as Air India. The government at present follows a policy of 51 percent government stake in PSUs and makes it flexible now to maintain the proportion below 51 percent. This reflects the willingness of the government to reduce their involvement and control of management in the case of select PSUs. The gross borrowing plan of the government has been extended to external markets in other currencies. It can be risky at the same time beneficial if it is strategically planned. The government has also decided to introduce coins of the denominations of one, two, five, ten and twenty rupeein order to facilitate public use.

The budget had turned out to be a mixed bag for the equity market. On the one hand the investors cheered on positives like easier investment regime envisaged for foreign investors, easing liquidity for NBFCs and recapitalisation of banks and on the other got spooked by some of the provisions like the proposal that would force companies to dilute promoter holding, lack of any major announcement regarding the revival of consumption demand and addressing rural distress. Though the markets started with positive vibes on the day of budget presentation, the benchmark indices dipped into red eventually due to the negative sentiments radiated across. On the same day, around 1700 stocks lost ground against 770 companies gained on the same day in Bombay Stock Exchange (BSE) and the indices Sensex and Nifty closed by almost 395 and 136 points down respectively. Three things could be attributed to this short term adverse impact on the equity market. One, there were measures expected to lift consumer spending including the revision of income tax exemption basic slab from Rs. 2.5 lakh to Rs. 3 lakh. However, this slab was kept unchanged and on top of it, there was a sharp increase in the tax rate of the ‘super rich’ category which in turn has implications for the spending on premium products and services. Two, as already mentioned, the investors got spooked by the proposal to increase the minimum public shareholding to 35 percent from the current 25 percent for listed companies. Three, the cut in corporate tax rate was restricted only to firms with a turnover up to Rs. 400 crore came as a disappointment to the markets.However, these provisions may have only short term impacts as any of them may not directly affect the profitability of firms or investors. No doubt, any measure that ensures higher investment will have a positive impact on the economy due to the currentlow level of inflation. Therefore, the bailout packages announced by the FM is a good sign in this direction.

Way Forward – The Question of Long Term Sustenance

The issue is all about reviving the economy and lifting it to the path of long term sustenance. The signs of a severe slow down place the biggest challenge of recent times in front of policy makers. This needs not only a careful scrutiny of the situation but also diligent action in terms of selecting the most appropriate measures in fighting the recessionary trend. Of course, raising public spending is a much-needed weapon to be utilised in such a situation. The balanced growth of different sectors of the economy is a key aspect of long term sustenance. However, the low growth of agricultural sector along with declining growth rates of manufacturing and services sectors is the biggest challenge of modern times which altogether lead to a ‘pull effect’ on the overall growth of the economy. In this regard, it is important to look at the policy kit of the Government and the Central Bank. A healthy mix of policies of adjusting the liquidity [monetary policy} and aggregate expenditure {fiscal policy} is considered to be ideal. Finding such an ideal combination is not so easy as it is explained theoretically. It involves not only the analyses of real data and the accurate interpretation of results but also the constructive debate among economists and policymakers in terms of the most appropriate policy instrument to be used.

Contributed by-

Dr. Joshy KJ – Associate Professor and Head, 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.

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

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