India is divided over the Interim Budget 2019-20. Opposition political parties argue that it is a political budget aimed at the general elections which is in less than three months. They further argue that the budget has no growth direction. The government claims that the Budget charts the future road map for larger social security network.
Both these arguments are largely true. The Budget is full of populist measures, many of which are proposed without adequate administrative and financial support. On the other hand, given the requisite support, these populist measures themselves have the potential to turn into a bigger social security network.
As for the lack of growth direction; the fact is that the Budget speech in its ‘State of the Economy’ section has only narrated the past achievements and painted a rosy picture for the future without giving details of how the country would achieve higher GDP growth. To note, the Budget speech has remained silent about industries barring the entertainment industry and has not uttered the word company or corporate.
Admittedly, the government now does not wait for the Budget for important policy decisions and it is not surprising that the Budget has left the issues of corporate India untouched. The market forces are now influencing the government’s activities in a much bigger way and the North Block often takes measures based on macro-economic developments instantly, without waiting for the next Budget. Unlike in the past, the government seems to prefer to take politically sensitive decisions outside the Budget. The past example of increasing the cap on foreign direct investment (FDI) on multi brand retail trading or increasing import duty on gold to curb spiralling current account deficit are cases in point.
In fact, the recent cut in policy rate by the central bank is seen as a positive move to usher higher growth. “RBI’s decision to reduce the repo rate from 6.5% to 6.25% and change of stance ‘neutral’ will give a boost to the economy,” the incumbent finance minister has said.
The budget speech for fiscal 2020, delivered by interim finance minister Piyush Goyal was loaded with populist measures, including sweeping tax cuts for India’s middle class, a new income support scheme for farmers, and a new pension plan for labourers.
Targeting the country’s farming population — a huge voter base which employs over 50% of Indians — the government has come out with an income supplementing scheme. To provide an assured income support to the small and marginal farmers, the Budget announced the launching of a scheme, namely “Pradhan Mantri Kisan Samman Nidhi. Under this programme, vulnerable landholding farmer families, having cultivable land up to two hectares, will be provided direct income support at the rate of Rs. 6,000 per year. This income support will be transferred directly into the bank accounts of beneficiary farmers, in three equal installments of Rs. 2,000 each. This programme will be funded by the government. Around 12 crore small and marginal farmer families are expected to benefit from this, the finance minister said. The programme would be made effective from December 01, 2018 and the first installment for the period up to March 31, 2019 would be paid during this year itself. This programme will entail an annual expenditure of Rs. 75,000 crore.
Goyal announced a new mega pension scheme for workers in the unorganised sectors. This pension scheme will provide them an assured monthly pension of Rs. 3,000 from the age of 60 years on a monthly contribution of a small affordable amount during their working age. An unorganised sector worker joining the pension scheme at the age of 29 years will have to contribute only Rs. 100 per month till the age of 60 years. A worker joining the pension scheme at the age of 18 years will have to contribute as little as Rs. 55 per month. The government will deposit equal matching share in the pension account of the worker every month. A sum of Rs. 500 crore has been allocated for this scheme. Additional funds will be provided as needed. The scheme will also be implemented from the current year.
Another dramatic move was the sweeping tax cuts for the middle class. While previously, the cut-off for tax exemption was at an annual income of Rs. 2.5 lakh, a full rebate will now be extended up to earnings of Rs. 5 lakh. Even taxpayers with an annual gross income of up to Rs. 6.5 lakh can now be tax-exempted if they invest their money in tax-saving schemes and provident funds. Goyal claimed that about 30 million middle-class taxpayers would get relief from this change.
The list of benefits to middle class tax payers does not end here. Standard deduction increased from Rs. 40,000 to Rs. 50,000 for salaried class employees. TDS threshold for home rent increased from Rs. 1.8 lakh to Rs. 2.4 lakh. Additionally, the budget has also provisioned no tax on interest income from fixed deposits from banks and post offices up to Rs. 40,000 and gratuity limit increased for workers from Rs. 10 lakh to Rs. 30 lakh.
The proposals to give financial support to farmers or to lessen the tax burden of the middle class were possible, the incumbent finance minister claims, because of the booming macro-economic fundamentals. In the last five years, India witnessed its best phase of macro-economic stability following transformational structural reforms taken by the government. It became the 6th largest economy in the world on the grounds of high growth rate, single digit inflation and improved fiscal balance.
As for financial stability, the Budget has come out with a roadmap to reduce the fiscal deficit, the gap between total expenditure and revenue, to 3% of the GDP by 2020-21, and eliminate primary deficit. As per the medium-term fiscal policy cum fiscal policy strategy statement the government is aiming to contain the fiscal deficit at 3.4% in the current as well as next fiscal, and then bring it down to 3% in 2020-21. As for failing to meet the fiscal deficit target in 2018-19, Goyal said that the government would have maintained fiscal deficit at 3.3% for year 2018-19 but for higher developmental expenditure incurred.
Budget proposals to support small farmers, to introduce pension scheme for workers of the unorganised sector, and to lessen middle class tax payers’ burden are welcome moves. The question is: Where would the revenue come from? For example, the finance minister has remained silent about Corporate India. He has neither heeded their long-standing demand to cut tax rate nor has he forwarded proposals to ease out their working atmosphere. It may be that the government thinks India’s ascendance in the ‘ease of doing business’ index is good enough to bring in more investment.