In her maiden Budget speech that lasted for nearly two hours and seventeen minutes, India’s first woman Finance Minister, Nirmala Sitharaman has driven home a clear message—from now onwards she would boldly balance the Narendra Modi-led NDA government’s political objectives and macroeconomic objectives.

What are the key points that emerge from the FM’s Budget speech?

One, that the Budget is intensely political. Emulating PM Modi’s drive in the first term to provide toilets on a large scale to avoid open defecation and promote cleanliness (which were particularly important for girls and women), the FM has embarked on a Har Ghar Jal scheme that aims to provide safe and adequate drinking water to all rural households by 2024 under the Jal Jeewan Mission. Likewise, the FM’s promise to provide every single rural family with electricity and clean cooking facility by 2022, the 75th Year of Independence, is an indication that the Modi government is in no mood for complacency even after the landslide victory in the 2019 Lok Sabha polls. Similarly, the announcement of pension benefits to about 3 crore retail traders and shopkeepers whose annual turnover is less than Rs 1.5 crores under the PM Karmayogi Maandhan Scheme is an attempt by the FM to endear the Modi-led BJP government to its traditional and core political constituency.

Two, the budget also aims at stepping up long-term economic growth by its emphasis on infrastructural investment. The FM’s big-bang announcement of investing Rs 100 lakh crores in infrastructure over the next five years reveals her intention to boost the growth of the Indian economy in the long run. Likewise, the decision to upgrade 1.25 lakh kilometres of rural roads to the Pradhan Mantri Gramin Sadak Yojana (PMGSY) is indicative of accelerating growth of rural India in the future.

Three, in social sector spending the FM’s heart seems to be in the right place. The FM has proposed an over 15% increase in the health sector outlay for 2019-20 with a focus on PM Narendra Modi’s pet Ayushman Bharat health insurance scheme. The allocation for Ayushman Bharat has increased by two-and-a-half times, from Rs 2,400 crores in 2018-19 to Rs 6,400 crores now.

Four, the FM also plans to keep up the Narendra Modi government’s pet theme of financial inclusion in this term too. Her decision to provide encouragement to PSU banks by strengthening their capital base by Rs 70,000 crores and to extend a lifeline to the NBFC sector by providing indirectly a financial support of Rs 100,000 crores is a pointer to the government’s commitment to greater financial inclusion in the future too.

Five, fiscal discipline seems to be the FM’s mantra. Instead of giving in a “stimulus package” as anticipated by some to boost the current sagging growth of the economy, Nirmala Sitharaman has stuck to the fiscal deficit targets laid down by the Fiscal Responsibility and Budget Management (FRBM) law. She has promised to bring down the fiscal deficit to GDP ratio to 3.3% in this fiscal from the 3.4% earlier.

Six, resource mobilisation has also has been a part of the FM’s agenda. The decision to enhance the target of revenue proceeds from disinvestment of PSUs to Rs 1.05 lakh crores in 2019-20 from Rs 90,000 crores envisaged in the interim budget earlier is a step in the direction of boosting the union government’s resources. Likewise, the decision of the FM to allow borrowings by the government in external markets in foreign currencies is a move to raise more funds for the state exchequer. An indirect advantage of this decision of the government to borrow abroad would be that there would be less “crowding out” of resources that the domestic private sector can raise for their investment projects.

Seven, the FM’s tweaks on the Foreign Direct Investment (FDI) regime also seem positive. The possibility of easing FDI policy in aviation, media, animation and insurance may raise resources in the future. Likewise, permitting 100% FDI for insurance intermediaries and easing norms for local sourcing for single brand FDI retail companies are steps in the right direction. Overall, this move to relax the FDI regime also appears in consonance with the FM’s intention to boost long-term economic growth of the nation.

Eight, the FM’s move to start a Social Stock Exchange, wherein social entrepreneurs and NGOs working for social welfare can raise resources or capital through equity, debt and mutual funds, is a noteworthy and innovative move.

However, on the flip side, the Budget suffers from two clear weaknesses.

One, the move to raise Rs 2 per litre on petrol and diesel (one rupee through an additional excise tax and one rupee through a cess) will hurt both the middle classes and the poor. The middle classes will be directly hit as they will have to shell out larger payouts on their petrol and diesel bills on their two-wheeler and four-wheeler vehicles. The poor will be hit because all such levies have a “cascading effect” on the economy leading to higher prices of essential items like vegetables, fruits and milk, which would also lead to an overall increase in  inflation in the economy.

Two, while the FM’s plea, that the “super-rich” must also contribute more to the economy and the nation, is correct, but the means she has used may fetch perverse results in the future. The FM’s decision to impose a surcharge on those earning between Rs 2-5 crore per annum and for those earning more than Rs 5 crores per annum by about 3% and 7% respectively may turn out to be unwise in the ultimate analysis. This move appears to be an “old school” style where it was believed that raising marginal tax rates bring higher revenues. However, the “Laffer curve” hypothesis postulates that higher marginal tax rates discourage work-effort and savings, thereby leading to lower economic growth and lower tax revenues in the future.

Meanwhile, after Ms. Sitharaman’s speech, Prime Minister Modi will now have to gear up Ministries for spending adequately and efficiently whatever has been allocated to them, set up benchmarks and monitor them on a regular basis.

Kartikeya Sharma is Founder, iTV Network.


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