The basic philosophy of the budget is that tax cuts will place more monies in the hands of the companies and the rich, which will get invested, firing up the economy. This has not happened and will not happen.
The Finance Minister (FM) has given relief to the individual taxpayer, which only spells trouble for the government, amounting to a revenue loss of Rs 40k crores. Reductions in Minimum Alternate Tax and other taxes payable by corporations will lead to a further loss of Rs 25k crores. The FM has proposed to cover this loss of Rs 65k crores with increased borrowings that will increase the fiscal deficit from present about 3.4 percent to 3.8 percent in the coming year. I have been a supporter of increasing fiscal deficit for jumpstarting growth, which would have taken place if the FM used the borrowed money to increase investments. Instead, it has been used to give more money to the rich.
The FM’s belief is that this relief will put more money in the taxpayers’ hands that will naturally translate into increased consumption or investment. An increase in consumption is indeed likely to take place. But the beneficial impact of this increase may be muted as taxpayers come from the richer sections of the society and part of the additional monies in their hands will find their way towards the purchase of gold or foreign goods. Say, a reduction of Rs 100 is made in the individual income tax. Of this, we may assume that Rs 50 will go to increased consumption, Rs 25 to consumption of gold or foreign goods and the remaining Rs 25, maybe Rs 15 will go in the purchase of goods manufactured by big companies. The demand for goods made by the small industries will increase by a paltry Rs 10; while burden on the common man will increase by Rs 100.
There is little possibility of this resulting in increased investment. A businessperson having more money in their hands will invest it only if there is demand in the economy — from the common man. Nothing in this budget instigates that. A businessperson will, for example, invest in a new restaurant only if the common man has more money to eat out. If lacking the money to invest, they will borrow, from relatives or banks, and make the investment regardless, even without tax reliefs. To conclude, this exercise will only lead to a loss of revenue for the Government.
There will be more damage. The Government is already reeling under the loss of revenue of Rs 145K crores from reduction in the Corporate Income Tax last September. Alongwith the earlier mentioned losses of Rs 65k crores, the total arrives to a whopping amount of Rs 210k crores, that are to be made up by increased borrowings. Thus the projection of fiscal deficit of 3.8 per cent. Borrowings will increase the burden of interest to be paid in the future. Direct taxes cannot be relied upon anymore, and so, indirect taxes such as GST or import taxes will take the load. Which plays into reduction of the common man’s purchasing power, i.e. reduction in demand in the market. Money can also be raised from disinvestment. But, this too, is only encashment of the investment made with the taxes collected from the common man in the past. Overall, the FM has given tax reliefs to the rich and imposed tax burden on the poor — whether in the past, present or future, relying on the fundamental misconception that investment will increase without increasing demand.
The FM has expressed happiness that India’s rank in the global trading index has improved from 80 in 2018 to 68 in 2019, concluding that India has become more adept in foreign trade. Reality says otherwise. This improvement is due to an increase in imports; not exports, which she acknowledges, is courtesy Free Trade Agreements made by us. She has also said that she will strengthen safeguard and dumping duties and investigate subsidisation of imported goods. Thus the improvement in our rank in the index is due to weakening of our economy and increased inefficiency of our businesses! That said, kudos to the FM for increasing the import duties on labour-intensive goods like footwear and furniture. However, this is a minute step when the need was for a leap.
The FM must understand that the root cause of decreased exports and increased imports are the rents extracted by our bureaucracy and judiciary. The immediate plausible solution is to impose high import duties until we solve these structural issues. She did raise the issue of governance, but deflected it towards greater use of technology. Though commendable, it does not solve the obstructions created by these organs of the State. We should appreciate that mere use of technology will not help as we are seeing in GST. A parallel economy has developed, where shopkeepers ask the customer to pay GST if they want a bill for the purchase. Therefore, this budget will not deliver. The purchasing power of the common man will remain subdued, small industries will remain under pressure from imports, our exports will continue to flounder and the economy shall remain at this snail-like pace.
The writer is former professor of Economics at IIM Bangalore.
