A tale of two budgets

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VIADr. Kamal Monnoo
SOURCEThe Nation
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About a fortnight back the Indian Government announced its first post Elections 2019-20 Budget, and it will be interesting to see how it compares with the first Budgetary Announcements 2019-20 of our new government here at home. The recent Indian Budget is being hailed as a classic from the Bharatiya Janata Party-led NDA’s (National Democratic Alliance) playbook, which is aimed at giving India the center stage. Moreover, it implicitly incorporates (in Thaler’s term) the “nudge” economy as its core underlying strategy. Nudge meaning, to give an enabling environment to the Indian Private sector and let it do the rest. Here are some of the main takeaways from it and how they compare to similar policies, as unleashed at home.

Also Read: Budget measures slow down realty sector

1) The Indian or the Union Budget, as it is referred to, mainly focuses on fiscal restraint by the government. Not only does it not succumb to the temptation of any unnecessary governmental spending in what is likely to be a very difficult year in fiscal terms, it practically commits itself to instead lower the fiscal deficit (or gross borrowings of the government). The underlying assumptions here being that tax collection will continue to be healthy as long as the private sector is given confidence and fiscal space (in borrowings) and more importantly, in recognizing that the emphasis of revenue collection should lie on non-tax receipts (especially with respect to realizing over Indian Rupees 1 trillion from its disinvestment target of the SOEs and auctioning other instruments in the next eight months) while projecting only a modest growth in its expenditure of around 13%. This, despite taking on additional spending under its various social welfare programs and packages to alleviate farm distress – the allocations for agriculture for example are projected to grow by a staggering 75% in this fiscal year. In contrast, the Pakistani Budget single-mindedly focuses on running the markets dry of any liquidity by resorting to excessive taxation; has given no real plan on the future of its SOEs. In the process making capital more and more dear for the average business, something which going forward is bound to stoke economic contraction and unemployment.

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2) Interestingly, this Union budget yet again has its fair share of out-of-the-box ideas. The standout one being the paradigm shift in financing of the budget itself, in this that a good chunk of the fiscal deficit will be funded through government borrowings from abroad. Underlying idea here being to dollarize the fiscal deficit to basically achieve two goals: One, to avoid crowding out of the Indian private sector in the key consumption led domestic markets and Two, such a move will allow the Indian government to avail the advantage of using the low interest rates prevailing in the international financial markets, thanks to the glut of money in the same. No such concern for the private sector here at home or for that matter any clever thinking on low cost financing of government’s needs, other than just looking at the IMF!

3) The Indian budget also reflects the certitude of thought that has prevailed in India for some years now, by further pushing through the demonetization of high-value currency notes. Similarly, it ruled unequivocally in favour of electric vehicles and, in the process, underlined its willingness to walk the talk on a green economy – And this, despite resistance from a very strong Automobile Sector’s lobby in India. No such forward thinking or global perception building here though!

4) One can’t help but be impressed by the sheer prudence of this Indian Budget – a government cognizant of the pressing ground realities cum problems, which, if ignored, could balloon into a crisis. In this context, it was significant that the Union budget threw a lifeline to the ailing Indian non-banking financial companies (NBFCs). The idea behind this being that not only will it provide for or rather not jeopardize the much-needed liquidity by the private sector, it will also prevent the present crisis of some long lingering toxic loans from degenerating into a contagion. No such apathy for the private businesses and entrepreneurs witnessed here.

5) Finally, the optics were spot on. By making India the central focus, it has been able to stick to its mantra of being pro-poor and pro-business at the same time. The last time NDA showcased its pro-business credentials with a push for a new land acquisition law, the Indian opposition parties accused it of being a “suit-boot sarkar”. This time though the essence was still the same, it has been undertaken with a lot more prudence: In a carefully crafted 127-minute budget speech, the finance minister ensured that even the handouts to corporate India—like the increase in customs tariffs to protect domestic industry or the lifeline to NBFCs—were carefully balanced. Keeping with Modi’s frequent election time summation of India being made up of two classes—the poor and those who help the poor – Ms. Sitharaman targeted the top 1% with some fresh direct tax taxes and levies while making sure that no new taxes or an increase in existing taxes are incurred on the Indian businesses, especially on the SMEs and the individual earners. In sharp contrast, the overzealousness of the revenue managers here to set unrealistic revenue targets and implement changes with knee-jerk actions, runs the risk of dismantling the entire underlying structure of the Pakistani economic activity.

The thing is that this positive economic direction in India has not just happened by chance, but a lot of careful and visionary thinking has gone into this exercise. The foundation of this strategic thinking is primarily based on 3 main pillars: First, that India desires growth with a target of becoming a $5 trillion economy by 2022. Regrettably, no such ambition at our end! Second, the key to achieving economic success is to urgently address any perceptible or possible slowdown challenges to GDP growth. So, the options here, as we know, are basically two: To either do it through consumption enhancement (including enhanced government spending) or by stoking a revival in the investment cycle. The first option has been termed by this Indian Government as an undesirable, since it believes that its space for fiscal manoeuvre is extremely limited, so naturally it prefers the latter; meaning, generating a demand for investment per se by incentivizing investors. Third, given that its last year’s roll-out of the goods and services tax (GST) has already somewhat limited the traditional scope of taxation in the Budget, the government has been fully conscious that the any new efforts to revive investment are likely to be achieved only through downward tweaks in direct taxes; by significant improvements in easing the economic system of the country; and by providing clear tax incentives to promote entrepreneurship cum job creation.

Bold and visionary policymaking requires belief and to be able to bring about a real culture change in the economic management requires strategic thinking. Taking up from the work of Richard Thaler, the scholar from Chicago Booth School of Business who won the Nobel Prize for his seminal work on behavioural economics, leveraging the Behavioural Economics of Nudge, provides the theoretical construct to understand the behavioral changes sought by the recent Indian governments. At the core of Thaler’s philosophy lies the belief that, “People should not always be regarded as irrational, unpatriotic, tax-dodgers or as biased individuals. As a result, their actions are merely influenced by the very way the choices are presented to them.” Perhaps it will do this government a lot of good to understand this sensitivity!

(This news/article originally appeared in The Nation on July 17th, 2019)

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