Budget 2019: Heading towards a 5 trillion-dollar emerging market?

The finances for the economy were presented in the budget by Sitharaman to display the goal of the government for the year 2019-20. The media succeeded to cover this announcement by displaying the views of experts and their opinions on the budget to analyze whether it was a nosedive or a realistic structure to supplement the economy. The budget is essential to determine whether the government was able to recognize the problem areas of the economy and heed the distress of specific sectors of the economy. Often, the government allocates higher funds to certain sectors that might help boost short term goals of the economy which might lead certain people to be disappointed by the budget. Either way, this budget was able to adequately meet long term goals rather than address immediate needs of the economy and predominantly concentrated on agriculture, infrastructure and ease flow of capital.

The picture in 2018

The net expenditure in 2018 was set at $383.93 billion. The key focus areas of the budget in 2018-19 focused on agriculture, healthcare, infrastructure and education. The growth rate in the previous year was higher and reached 6.6% as compared to the current rate of GDP of 5%. The fiscal deficit was set at 3.5% from 3.2%. In terms of the middle class, the government provided incentives in the form of tax deduction of $1.41 billion however, did not change the income tax rate on the salaried class. The government also worked towards formalization of jobs in the economy and proposed that the government would provide 12% of the wages to most sectors within a time period of 3 years. The government also reduced the corporate tax rate to 25% for the companies with a turnover of Rs 250 crore and below.

Additionally, there were health insurance schemes for 10 crore families with a cover of Rs 5 lakh per year. For agriculture, the government raised the minimum support price for Kharif crops to 1.5 times the production cost and covered Rs 14.34 lakh crore on rural infrastructure for different schemes and departments. For the education sector, the government pledged to invest 81,868 crores for improving facilities. The infrastructure expenditure was also raised to Rs 5.97 lakh crore and set to complete 9000km of national highways. They also successfully benefited 8 crore individuals under the Ujjwala scheme and increased expenditure for rural sanitation.

One major drawback of this budget was the introduction of LTCG on capital gains of over Rs 1 lakh. All in all, the budget was perceived to be mediocre in 2018. The health insurance scheme was perceived to be a copy of Obamacare in America, and this type of scheme may not be feasible in India as an amount of Rs 1200 crore would not be sufficient to even come close to the required amount for this scheme to pan out. In addition to this the middle class was neglected in addition to the creation of jobs. While the government may claim that by giving a boost to MSME’s would help create jobs for the economy, it is imperative to supplement the private sector in order to see any real changes in the economy. Due to the fact that the private sector is responsible for generating a majority of the jobs in the economy, development of the economy, agriculture (because of informal jobs) and higher contribution the people were skeptical about this budget gave the lack of tax deduction for the private sector. The lack of attention given to the job market was also astonishing given the high unemployment rate in the country. Thus, people were left questioning the government.

What was delivered in 2019

The Modi government was aiming towards fiscal consolidation in the 2019 budget however the public was left searching for ‘animal spirits’ to realistically achieve the $5 trillion mark given the budget formulated in 2019, which more or less seemed like an extension of the previous budget. If the government aims to reach this target in 5 years, they would need reforms in addition to this budget in order to revive growth to 9% from its current 5%. Sitharaman’s stand was relatively safe and did not do much for the middle class, like the budget in 2018. Similar to the budget in 2018, the budget in 2019 concentrated on sectors such as rural expenditure and infrastructure. The middle-class group comprises people who live between $2 to $10 per day. This includes all groups of lower, middle and upper-middle-class people. Out of a population of 1.3 billion people, the number of middle-class people is between 78 million to 604 million. This accounts for approximately 6% to 46% of the total population for which the government must formulate measures that are adequate to support this crucial section of the economy.

In the face of the election in 2019, the government had to take a few measures to gain the trust of farmers and small business. But they also concentrated on the private investment however that was done marginally by decreasing corporate tax from 30% to 25% for companies with a turnover of Rs 400 crore. While the government has done enough for the public sector it is imperative to look into private sector investment as it is a crucial factor that drives growth. The government also strived to tax the rich and leave no incentives or additional taxes for the middle class. They also concentrated on reviving consumption expenditure in order to restore the economy due to the liquidity crunch in 2018-19. In addition to this, incentives to improve the flow of capital markets were made along with increasing exports in the country. This would help in globalization of the economy as foreign investors would think of this emerging market as a relatively cheaper investment in terms of FPI.

Also, recapitalization of the public sector done by the government would be essential to improve credit flow as incentives implemented for housing, highways, airways, private entrepreneurship and railways would supplement this goal. A 9% growth rate would be sufficient in order to achieve the $5 trillion mark which may be challenging if the government does not consider paving a path around meritocracy, crony capitalism, high oil prices, water crisis, high real estate prices, unskilled population and inefficient public sector enterprises.

The millennials, however, were benefited from this budget given the governments allocation of expenditure towards education, innovation, artificial intelligence, big data, 3D printing as well as towards research and development. This budget more or less helped reach the desired expectations for the public; more so than the budget presented in 2018. The market, however, did not seem pleased with the budget as the short-term goals are not directly impacted in this budget. However, by moving towards a green economy and allocation of funds for solar panels by encouraging manufacturing in India, the government seems to enhance its mission to ‘Make in India’. One of the indices to measure the performance of this project includes Industrial Production Index which shows that in terms of the base year (2011), the overall manufacturing in all sectors has risen. However, when this index was computed with respect to the previous year, the index shows a decline for all sectors for the year 2018. While FDI inflows show that the government was successful to attract an investment of Rs 2.8 trillion in 2017, the FDI in manufacturing is moving slow. It is therefore questionable whether the government delivered those animal spirits as compared to the assurance they made under this scheme.

Additionally, by expanding the rural markets by encouraging zero budget farming to shift farming practices to eventually achieve sustainability, the government essentially would achieve its long-term goals. High net worth individuals were taxed due to which the government represents its initiative to bring equality however it adversely impacts investments especially in the private sector which is the need of the hour and hence may have a negative impact overall. In addition to this imposition of the tax, the inflationary pressure would change interest rate cycles. Furthermore, while Sitharaman has dealt with the ease of doing business, it is imperative to concentrate on ease of living in the next budget.

The two budgets concentrated on two sectors in common however, one seemed to be superior to the other given the progressive mindset of the government displayed in the budget in 2019. While Sitharaman argues that people’s response to policy measures is crucial in implementation based on people’s receptiveness, it is essential to determine the adverse impact of such reforms on the people when the adverse impact of these policies is not known in the initial stages. It is crucial for the finance minister to evaluate the impact and suggest policies in the next budget that are conducive for growth. While the number ($5 trillion) looks impressive, it is better to work towards a better structure rather than looking towards that target as in formalization of jobs is required given the problems in the job market that have been a problem since the previous budget. Therefore, as we progress towards a world that’s dependent on each other, we require a budget that has a clear goal along with evidence that backs the claim made by the government. While the government has made significant changes through this budget, only time will tell until the next budget when these expenditures are evaluated.