Decoding the 2020-21 Union Budget: Bombastic Speeches and a Plummeting Economy

In her speech announcing the 2020 Union Budget, Finance Minister Nirmala Sitharaman confidently espoused that the mandate of the people, by virtue of re-electing the Narendra Modi-led Bharatiya Janata Party government, reposed faith in the union’s economic policies. This, however, comes against the backdrop of a plummeting domestic economy. The World Economic Outlook 2020, released by the International Monetary Fund, reduced India’s growth forecast to 4.8% within the first three months of 2020. This reduction, the report claims, is largely due to a sharply slowing domestic demand, stress in the non-banking financial sector as well as decline in credit growth. Such a slowdown in an emerging economy such as India has contributed to a decrease in the global growth forecast by 0.1%.

Yet, the budget speech rang hopeful and sang high praises of India’s economy. Sitharaman asserted that the 2020 Union Budget was to be pegged to three prominent themes, that is, an “aspirational India,” “economic development” and a “caring society.” These three themes were to be the flowers in the bouquet that is “Ease of Living.” She further claimed, “Holding this bouquet together are two hands– one, corruption free, policy-driven good governance and two, clean and sound financial sector.” Very soon, though, the Indian markets were crippled with a financial crisis by way of the moratorium on Yes Bank and the subsequent proposal for the State Bank of India to take over the sick bank. The Yes Bank crisis, though, is one in the long list of India’s financial woes that began to surface after Infrastructure Leasing & Finance Services (IL&FS) declared insolvency. Apart from the financial sector, India’s overall gross domestic product (GDP) continues to decline, and is supplemented by falling consumption expenditures and declining employment. 

The two realities, then, that of the statistics pertaining to the economy, and that of the picture painted by the budget speech, seem to be in contradiction to each other. Partha Ray and Parthapratim Pal, in their article for EPW’s Special Series on Budget 2020-21, succinctly observe this contradiction through an analogy,

Metaphorically speaking, going through the Union Budget 2020–21 is like reading Gabriel García Márquez’s 1985 classic novel Love in the Time of Cholera, where optimism is seen to coexist with physical diseases. After all, the term “slowdown” is conspicuous by its absence in one of the longest budget speeches in recent history, so much so that in making sense of the myriad of things that the budget proposed, one may even get an uncanny feeling of skating on thin ice.

In this reading list, then, we explore EPW’s Special Series on the Budget 2020-21, and highlight its bombastic proposals along with their implications in real terms. 

Import Tariffs and Protection of Domestic industry

Following India’s withdrawal from the Regional Comprehensive Economic Partnership (RCEP) in November 2019, Biswajit Dhar and Ramaa Arun Kumar draw attention to the emphasis of the Union Budget 2020-21 in increasing import tariffs. They note that such an emphasis has come about as a result of the implementation of free trade agreements (FTAs)  with the Association of South East Asian Nations (ASEAN), Korea, and Japan as well as the presence of China in RCEP, all of which adversely affected domestic businesses. For instance, between 2014–15 and 2018–19, the average growth of merchandise exports slumped to 1.4%. This inability of India’s exports to find access to a sizeable international market, and thus declining global competitiveness, has resulted in the government’s push towards protectionist trade practices in the union budget. This has included more “stringent checks” on the FTAs, additional provisions under the Customs Act to regulate items being brought into the country, as well as a hike in import tariffs. However, Dhar and Kumar observe that the budget’s prescription of raising taxes to preserve the domestic industry is not enough. 

... From the viewpoint of India’s manufacturing enterprises, especially those that are in the MSME sector, the government must do more than provide mere tariff protection. The sectors in which these enterprises operate have generally been beset with low levels of productivity and efficiency, a trend that must be reversed in order to enable them to survive in the future without additional doses of protection. This would require some serious interventions by the government to address the many adversities that the MSMEs face in the marketplace, which begins with the availability of credit and goes right up to the terms on which they market their products. Moreover, there is a need for an industrial policy for removing the infrastructural limitations and providing a boost to raise competitiveness of the small sector rather than reducing the amount of competition from the global markets. Providing protection is just the first step towards rejuvenating the MSME sector.

Govinda Rao comments on this turn towards protectionism in his analysis of the union budget and its proposals with respect to taxation. Referring to it as a “disappointing measure,” Rao claims that both the language used while announcing the increase as well as the increases themselves are retrograde, and would prove to be counterproductive in today’s age of internationalism. 

The economy has suffered enough on account of the import-substituting industrialisation strategy and we have moved away from this after 1991. In fact, the experience shows that dismantling protection has led to substantial increase in gains in productivity and exports. Have we not learnt any lessons at all? Should we be moving away from joining the global value chains and impart competitiveness to our manufacturing sector by increasing protection? Is “Make in India” a means to make the domestic consumers buy expensive and non-standardised and inefficient goods? Here again, in the name of assembling in India, the customs duty rates are sought to be levied at lower rates on inputs and higher rates on outputs. Are we not aware that in such cases the effective rate of protection will be much higher than the nominal rate for the final goods? The trend towards increasing protection started four years ago and this budget takes it further. “Make in India” should be to increase our export competitiveness and not for inefficient import substitution.

Disinvestment of LIC and the Ailing Finance Sector

Partha Ray and Parthapratim Pal evaluate the small steps taken by the 2020 Union Budget to provide some fillip to the country’s ailing financial sector. For instance, the budget has proposed amendments which would allow non-banking financial companies (NBFCs) to extend invoice financing to MSMEs through Trade Receivable Discounting System (TReDS) as well as support through a partial credit guarantee scheme for NBFCs. This has been done largely to ensure that these companies, which began to feel stress in asset quality after the IL&FS crisis, would be able to revive their credit health. To further provide relief to the financial sector, the budget has focused on disinvestment in the Industrial Development Bank of India (IDBI) and the Life Insurance Corporation of India (LIC) as matters of chief priority. This would not only allow financial institutions (and therefore the sector) to become more self-reliant, it would also raise revenues for the government, which could then be targeted towards financing its other obligations. However, Ray and Pal note that these measures, though seemingly impactful, would only be fruitful in the short run. In the long term, these measures do not translate into the kind of structural revisions that are required to turn around the financial sector in India. Moreover, measures such as disinvestment have not been through, as their execution would involve more complication than what is currently assumed to be believed.

… The target for disinvestment looks quite ambitious. In fact, the government expects to raise ₹90,000 crore revenue in 2020–21 from its disinvestment in PSBs [Public Sector Banks]. Another ₹1.20 lakh crore is estimated from the sales of government holding in central public sector enterprises. This is much higher than the ₹65,000 crore of disinvestment the government has managed in 2019. The government’s ability to meet the disinvestment targets, to a large extent, will depend on the proposed dilution of government holding in LIC. LIC is a massive company with about 31 lakh crore of assets under management. Given the size of LIC and its strategic importance, pricing of its initial public offering (IPO) will be a complicated issue and it is unlikely that the government will be able to complete all the due diligence required within a year. Besides, considering the fact that the LIC could withstand despite the entry of private players in the insurance market and despite more than 70% of all life insurance premiums paid in India going towards policies issued by LIC, other than questioning the motive behind such divestiture in LIC, it needs to be appreciated that divesting of LIC may turn out to be a difficult task.

16-point Action Plan for Agriculture 

Commenting on the 16-point action plan set down by Sitharaman in her second budget speech, Ashok Gulati and Pritha Banerjee observe that other than continuing the prioritisation of subsidies and safety nets over agricultural investments, the plan does not make any fundamental improvements in terms of allocation. Most interestingly, other than the Kisan Rail and Krishi Udaan initiatives, none of the 16 action points are new items. Hence, the 16-point action plan is, in fact, made up of pre-existing schemes that the government only intends to strengthen. Moreover, though the action points are a step in the right direction to resuscitate the agricultural sector in the long run, it does not do enough to double farmers’ incomes within the previously stipulated period. For instance, in real terms, the budgetary allocation to the Ministry of Agriculture and Farmers’ Welfare (MoAFW) has increased only 3.03%, when compared to last year’s allocation. When calculated as a percentage of total budgetary expenditure, the allocation has actually gone down from 4.97% to 4.67%. 

One interesting observation is that the share of expenditure on MOA&FW increased from 2.32% of total expenditure in 2018–19 to 4.97% of the 2019–20 budget allocations, 4.07% of the 2019–20 revised estimates and 4.69% of the total budget estimates of 2020–21. Prima facie, it appears that the government is assigning increased importance to the agriculture sector. However, the increase is solely due to the introduction of the PM-Kisan. In 2018–19, actual expenditures on PM-Kisan was only ₹1,241 crore as against the budgeted estimate of ₹20,000 crore. As against the budgeted estimates of ₹75,000 crore, the revised estimates for 2019–20 is ₹54,370 crore. There has been no change in the bud­geted estimates for the scheme for the current year.

Escape Clause and Deviating From Fiscal Responsibility

Lekha Chakraborty observes that the only move taken by Sitharaman with regards to fiscal consolidation has been to invoke the “escape clause” of the new Fiscal Responsibility and Budget Management (FRBM) Act, 2018. This clause allows for the government to deviate from initial fiscal deficit targets in times of distressing economic situations or national calamities, thus allowing them to increase their expenditures as compared to revenues. Therefore, instead of a fiscal deficit–GDP threshold of 3%, India will be adhering to a fiscal deficit–GDP threshold of 3.5% for fiscal year 2020-21. Other than this, the budget has not been used up to its potential as a fiscal tool to trigger the economy. Even the invocation of the escape clause has been shrouded in opacity, with the reason or the next steps left blank. 

... There remains a genuine confusion as to whether invoking the “escape clause” to deviate from the fiscal consolidation path is in response to the shortage in tax revenue, emanating from the unanticipated outcome of structural fiscal policies undertaken, or whether it is for increasing capital (infrastructure) expenditure.

Read More: 

A Low Growth, No Employment and No Hope Budget for ‘Aspirational India’ | K P Kannan, 2020

Fiscal Restraint Trumps Fiscal Stimulus | Sudipto Mundle and Ajaya Sahu, 2020