No budget will ever satisfy everyone. In particular, no budget has ever satisfied opposition parties. The ‘dream budget’ of 1997, which brought in a slew of reforms including reduction of tax rates, liberalised import, greater freedom for foreign investors, voluntary disclosure of undeclared income and the beginning of disinvestment in the public sector, is considered to be a pinnacle of performance for a finance minister. Stocks went up 6.5 percent a day after it was presented.
Years later, I was appointed revenue secretary in the finance ministry and learned that it had taken two years to recover from the dream budget.
In the words of Pranab Mukherjee in his book, "Unfortunately, the dream budget did not remain so. Though it did not exactly morph into a nightmare, in the course of the year, it was found that many projections of revenue receipts and expenditures were off the mark and did not conform to targets that were taken into account while preparing budgetary calculations. Consequently, there was a decline in the rate of growth and employment generation, coupled with rising inflation."
The budget for 2024-25 has to be considered similarly, as one with some good points and some weaknesses. I am not an economist, but have assisted with preparing six budgets, three with the Kerala government and three with the Centre. I studied economics at college. I am, therefore, probably at a slightly better vantage point than many others.
Nirmala Sitharaman's budget philosophy has remained constant. Fiscal rectitude is essential to her, and this is reflected in her full budget for 2024-25. She is determined to move resolutely towards the Fiscal Responsibility and Budget Management Act’s target of a 3 percent fiscal deficit, which is good for maintaining the economy's strength and reputation in financial markets.
The budget has several other good features. Investment in infrastructure remains high. Public expenditure on investment is necessary to offset the relatively low levels of private investment. Extending the guarantee scheme to term lending in the small enterprises sector is a good move, although it would have been better had it been extended to Micro Units Development and Refinance Agency Bank loans taken by new start-ups.
Another point has been her gradual attempts to simplify tax laws and procedures without pain to taxpayers, giving them the option to change or not. We saw this in corporate taxes, where companies were given the choice of lower tax rates if they opted for a simpler tax regime with fewer exemptions. We saw the same principle extended to personal income tax.
This year, she has simplified and consolidated the exemptions given to charitable societies, trusts, associations of persons and the like. She has also indicated her resolve to streamline and codify direct tax laws. This has been attempted many times in the past, and the finance minister will benefit from a great deal of paperwork done to make direct tax laws less onerous. The joke in the revenue department is that each time an attempt is made to revise direct tax laws, the government falls.
The weakness in the current budget is it remains firmly on the supply side, as has been this government's policy hitherto. This was seen before the pandemic, when growth remained sluggish due to low demand. Nothing particular was done to revive and strengthen demand. The economy was in a free fall during the pandemic, but the finance minister remained committed to supply-side economics. She seems to be firmly of the conviction that the road to growth lies in making companies more profitable and the poor will rise from poverty only if the wealth of the very rich trickles down little by little. She cut corporate taxes in 2019 as a stimulus but made no change in personal IT rates. Incidentally, the infamous farm laws also came disguised as pandemic stimulus measures, but were widely perceived as anti-farmer and pro-corporate.
The Indian economy recovered relatively rapidly after the pandemic, mainly because of the expression of suppressed demand and the availability of cheaper bank loans. Much of the credit for the bounce-back of the economy should go to the policies adopted by the Reserve Bank. The economy looks good today, with a GDP growth rate of 7-8 percent and high corporate profits. The question is whether the economy has enough energy to sustain these figures until we reach the projected Valhalla in 2047.
We do not see enough horsepower to sustain these rates in the long term, perhaps not even in the medium term. GDP growth rates can only be maintained if there is steady investment. Investment would be sufficient only if investors believe their product will be sold.
The sine qua non for sustained growth is supporting demand. Even though the GDP growth rate may look high—primarily because of the base effect of low growth during the pandemic—the consumption growth rate remains low at 3-4 percent. As a result, even though company profits are high and stocks are mostly booming, capacity utilisation in the corporate sector remains at 75 percent, which is insufficient to induce investment. Add to this the pain caused by the closure of thousands of medium and small enterprises during the pandemic. This is also reflected in high levels of unemployment. The immensity of this problem is concealed in what Joan Robinson called ’disguised unemployment’, as indicated in a 3-4 percent rise each in agricultural and casual labour.
Here is where the budget fails. Without more benefits to the middle class and lower income groups, demand will not grow, and without this, production and investment cannot grow. This weakness may show even in the medium term. In the long term, our investment rate may be affected by other factors, primarily the abysmally low rate of investment of 0.6 percent of GDP in R&D and inadequate investment in education and public health.
The government may have to pay a heavy price for its adamant refusal to look at the demand side, particularly the fall in incomes of the lower three-quarters of the pyramid. They have already paid for it by losing their majority in the Lok Sabha, and further retribution may be at hand.
(Views are personal)
(kmchandrasekhar@gmail.com)
K M Chandrasekhar Former Cabinet Secretary, Revenue Secretary
and author of As Good as My Word: A Memoir