A Budget aiming Economic Revival

By Sthanu R. Nair
The Indian economy has been facing several challenges in the recent period. The gross
domestic product growth has declined to a five-year low of 6.8% in 2018-19. The rate of
investment has been low compared to the past. There has been a slowdown in both urban and
rural consumption demand as evident from falling sales of commercial vehicles, consumer
durables, and fast-moving consumer goods. Unemployment rate (6.1% of the total labour force)
is at a historical high.
There are several reasons for this situation. The flow of domestic private investment has
saturated due to stressed balance sheets of corporates and overcapacity in crucial sectors. The
foreign direct investment (FDI) has also contracted due to the global slowdown. Consumption
finance has tapered off due to the stress in the financial system. The banks are cautious in
lending due to the risk involved in loan recovery. The Non-Banking Financial Companies have
borrowed short-term funds and lent it to long-term projects leading to drying up of their
liquidity. The lower food prices in the past five years have affected farmers’ income thereby
causing a slowdown in rural demand.
It is in this background Finance Minister Nirmala Sitharaman presented the maiden budget of
second Narendra Modi government. Broadly there can be three ways to overcome the present
challenges facing the Indian economy. One way is to raise the investment rate both in the
private and public sectors. This would result in more jobs, more income in the hands of the
consumers, more consumption and higher economic growth. The other way is to push
consumption spending by leaving more money in the hands of the consumers. This would
require an increase in public spending or a cut in tax rates. The third option is to follow a middle
path, i.e. a combination of stepping up investment and consumption spending.
Of the three choices, Sitharaman has chosen the first one. The budget proposes to augment
public investment by way of spending in physical infrastructure such as roads, railways,
waterways and in affordable housing. Interestingly, it is proposed to tap the Public-Private
Partnership (PPP) route to meet the huge investment requirements in the railway sector. It
remains to be seen if the government succeeds in this challenging effort. Going by budget
proposals, the push for private investment is expected to come mainly via Micro, Small and
Medium Enterprises (MSMEs), start-ups and FDI. The bulk of the industry-related budget
proposals are aimed at these segments. They include loans of up to ₹1 crore to MSMEs, 2%
interest subvention on fresh loans to MSMEs, up to ₹1 lakh loan for woman in every self-help
group (SHGs), setting up of social stock exchanges, freeing start-ups from excessive
government scrutiny, launching of TV channel promoting start-ups, permission for 100% FDI
in insurance intermediaries, and easing of local sourcing norms for FDI in single-brand retail
sector.
The emphasis on MSMEs, SHGs, and start-ups is welcome as there are limits to job creation
by the public sector and large private sector. Whereas the public sector is no longer in a position
to produce more jobs due to budget constraints, the large private companies, particularly in the
manufacturing sector, can produce jobs only in a limited number due to automation and

The author is Associate Professor of Economics, Indian Institute of Management Kozhikode. Views are personal.
Email: srn@iimk.ac.in
increased emphasis on efficiency. The best possible option in this scenario is to promote self-
employment through the promotion of MSMEs, SHGs, and start-ups. However, as the
Economic Survey 2018-19 has rightly pointed out in the context of MSMEs, the government
should fix a time limit say for example 10 years beyond which an MSMEs or start-ups should
be able to stand on its own, grow big and create more jobs. This strategy was successfully
adopted in China.
Coming to the farming sector, the budget proposals are aimed at making farmers and rural
community self-reliant and providing additional sources of income to rural households by way
of promoting allied agricultural activities. The proposals such as the promotion of Farmer
Producer Organisations, development of skilled entrepreneurs in agro-rural industry sectors,
promotion of bamboo, honey and khadi clusters, and establishment of a fisheries management
framework should be read in this context. However, since agriculture is a state government
subject, the success of these initiatives depends upon how well the centre works with the states.
Since the Interim budget presented before the general elections introduced the game-changing
direct income support scheme for the farmers it was not surprising that the full budget lack big
announcements for the farmers who are facing the brunt of lower food prices. It is expected
that ₹75,000 crore allotted in the budget for the farmer's income support scheme would
stimulate rural demand as it would put more money in the hands of the farmers.
Finally, the corporate sector, middle class and the rich have not much to cheer as the tax burden
on them was not reduced. The budget proposed to include all companies with an annual
turnover of up to ₹ 400 crores in lower 25% corporate income tax rate. Though this would
cover 99.3% of companies the promise of a gradual reduction in the corporate tax rate
applicable to all companies is yet to materialize. The middle class received no tax relief and
the top tax rates applicable for rich and super-rich has been increased. Above all the excise
duty and cess on petrol and diesel was increased by ₹ 1 rupee a litre. The underlying philosophy
of the tax policy of the Modi government seems to tap India’s tax potential to the maximum
extent through a combination of measures such as minimum tax relief, expansion of tax base,
enhanced transparency in a financial transaction, and effective use of technology to curb tax
evasion. The support that the middle class has shown to Modi in the just concluded general
election despite tightening of the tax net in the last five years would only bolster government’s
tax effort. But the onus is on the government to make sure that the increased tax collection is
spent efficiently for the welfare of all.