The technical name for the budget is Annual Financial Statement, which is essentially a yearly exercise in balancing the government’s revenue and expenditure over the course of the coming year. But if the first budget presented by a newly elected government can be reckoned as an indicator of the direction of the country’s economic trajectory for the next five years, then Mrs. Nirmala Sitharaman’s first budget was loud and clear about several things ~ at least so far as intent and aspirations are concerned. These include faster and greater integration with the global economy, creation of jobs through massive investments in infrastructure, sufficient confidence in the country’s monetary and fiscal stability and readiness to explore international money markets, simplification of the tax administration with concomitant reduction in the scope of corruption, through faceless electronic scrutiny in direct tax administration, strengthening the RBI’s regulatory powers for possible prevention of the IL&FS-type scams, giving a much needed boost to credit and investment, etc. There was also a positive indication that the reforms would be intensified, by allowing higher FDIs ceilings in many sectors and lesser restrictions on FIIs.

There were also many downsides as well, notably increasing import duties on several items with a misplaced protectionist focus on import substitution, inflationary increases in duties of petrol and diesel, reduction in the allocations of several important ministries/ departments vital for the Government’s ambitious flagship programmes like Swachh Bharat, Clean Ganga, etc. Among the affected are the departments of drinking water and sanitation, food processing, water resources, river development and Ganga rejuvenation. The Defence budget, practically at the same level as the one last year and especially at a time of very high security risks on our borders, was also a major dampener. Fiscal consolidation has been stressed, with a rather hazy roadmap. Drawing the surplus cash from PSUs has hitherto been a standard practice for bridging the fiscal deficits, through a buy-back route rather than disinvestment to the disadvantage of the concerned PSUs. HAL is a case in point which has been converted from a cash rich company into a cash scarce company unable to pay salaries of its staff without borrowing. This will probably continue. Similarly, expecting higher dividend payout from the RBI, a contentious issue, is another inefficient way of financing the Government’s fiscal deficit. The huge expectations from PSU disinvestment is also a tad overoptimistic. Jobs ~ the most urgent problem facing the nation ~ also got much less focus than it deserved.

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A Finance Minister’s job is a tightrope balancing walk and some compromises are necessary, especially so because the budget was presented amidst unmistakable signs of a slowing economy. Even the Economic Survey admitted that the manufacturing sector was decelerating, with the index of Industrial production grown at a paltry 0.3 per cent during Q4 of 2018-19, compared to 7.5 per cent a year ago; production for all categories of automobiles ~ commercial and passenger vehicles as well as two-wheelers ~ had declined, and so did consumption and investment, the primary drivers of our economy. It recognised that “the decline in GDP growth during 2018-19 arose primarily from deceleration in private final consumption in the final two quarters of 2018-19” due to” low farm income in rural areas arising from low food prices and also due to the stress in NBFCs which affected its lending”, leading to low growth of credit and investment. On the external sector, current account deficit (CAD) increased from 1.9 per cent of GDP to 2.6 per cent over the last one year. Though the widening of CAD was partly driven by the higher crude prices, it was largely due to the slowing of exports, both merchandise as well as services. The trade deficit now stands at $184 billion, up from $162 billion a year ago. Growth in service exports declined from 18.8 per cent in 2017-18 to only 5.5 per cent in 2018-19 and growth in imports also declined significantly, further slowing down economic activity.

The impact of all these was an overall slowing down of the GDP growth from 7.2 per cent in 2017-18 to 6.8 per cent in 2018- 19. Of course the slowdown was mainly attributable to global headwinds, including the ongoing trade war between the US and China and tensions in the Middle East, besides a decline in demand in the advanced economies without which consistent high growth rates in the emerging economies like India cannot be maintained. China is already on the spiral of retardation, and to boost the economy in this depressing global economic environment, the budget should have given some very strong positive signals to attract foreign investment and to rejuvenate manufacturing to create jobs. These signals, unfortunately, were conspicuously missing. Instead some potently wrong signals had emerged which may even drive investment further away. No wonder the markets were not impressed, as indicated by the continued fall in Sensex and Nifty indices. One such signal was the unintended consequence of raising taxes for the superrich to reduce the burden on others, with the peak tax rate being increased to 42.7 per cent, among the highest in the world. The proposal probably was not thought through. This may appeal to voters, but may ultimately harm the economy by diverting investments and businesses away from India. Besides, the Foreign Portfolio Investors (FPI) operate as trusts which have the status of legal persons for the purpose of tax, and were hitherto subject to 30 peak rate peak rate. Their tax liability now abruptly shoots up, pushing them to exit the Indian market. FPIs have been net buyers for the past five consecutive months, with net amounts invested in the Indian capital market, both equity and debt, being Rs 81,140 crore during March-June 2019. In contrast, during 1-12 July, they withdrew a net sum of Rs 4,954 crore from the equities market. Though they invested Rs 8,505 crore net into the debt market, their cumulative net investment amounted to only Rs 3,551 crore during this period, not sufficient to lift the market sentiment and stock exchange numbers. To stem the tide of falling investment, the Finance ministry has advised the FPIs to convert themselves into corporate entities so as to avail the lesser corporate income tax rate (30 per cent peak rate), but the budget did not offer enough incentives to nudge them to do so. For one thing, tampering with tax rates ~ whether for direct or indirect taxes ~ unnerves any foreign investor who always look for stability in political as well as the economic and fiscal environment so that they plan for their investments with a secure, longterm perspective. When rates are increased or decreased at the whim of every finance minister in every budget, they are obviously not enthused. We seem to have forgotten the lessons from our past reforms which lowered the tax rates and improved revenue while encouraging investment, industrial revival and thereby achieved nearly doubledigit growth.

The most important determinants of growth ~ lower corporate taxation, farm distress, export stagnation, labour and land market reforms, etc. ~ were left largely unaddressed in the budget. Labour code has been a work in progress for quite some time, and save the declaration of an intent of reforming our archaic labour laws, there was not much else; the clarity was completely missing. The lowering of corporate tax rates for industries with a turnover of Rs 400 crore would cover about 99.3 per cent of the corporate taxpayers, but it is the remaining 0.7 per cent big companies that contribute the bulk of income-tax revenue. The Finance Minister was obviously hesitant to include them in the lower rate bracket in view of the likely adverse impact of revenue collection, but given the dismal growth scenario, more boldness was called for. In fact there is hardly any incentive for a small company to expand and become a big company; it will then end up paying much higher taxes and forced to comply with stringent labour laws that negatively affect labour productivity. Smaller companies will rather diversify and expand in more taxfriendly countries. Many companies prefer not to distribute their profits as dividends as that will attract a stiff tax on dividend distribution, discouraging investors. The 20 per cent tax on buyback imposed in the budget has further closed the option of sharing profit with investors without incurring tax liability. The tax on long-term capital gains on stock trading imposed last year has not been beneficial to industries. If capital is not favoured over everything else, it will fly away to other greener destinations, something that our Finance Ministers are yet to learn.