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Budget 2020: Moneycontrol manifesto for Modinomics 2.0

There are heightened expectations that the budget will give a wide ranging policy impetus to turnaround the economy that is nursing multiple pain points.

January 30, 2020 / 07:59 PM IST

Finance Minister Nirmala Sitharaman will present her second Union Budget amid a faltering economy. India’s gross domestic product (GDP) is expected to grow 5 percent in 2019-20, confirming fears of a slowdown.

There are heightened expectations that the budget will give a wide-ranging policy impetus to turnaround the economy that is nursing multiple pain points.

The Union Budget for 2020-21 is likely to be built around the following four pillars.


The earliest markers of an economy’s health are found in car showrooms, retail malls and the rapidity of activity in farms. Recent months’ data related to these would suggest that the Indian economy is going through a bumpy ride.


Vehicle sales across all categories, for instance, have persistently declined over the last several months.

A household’s decision to buy a car or consumer durables such as televisions and refrigerators is not as much a function of current income as it is about expectations of future income. A majority of Indian cars and relatively costly consumer durables are bought through loans. There appears to be a crisis of confidence brewing among households, who may be feeling uncertain about their ability to finance a purchase over a three to five year period.

Fast moving consumer goods (FMCG) sector growth has also slowed down considerably in recent quarters, with a deceleration in demand for consumer staples, such as biscuits, soaps, oil. Perhaps, significantly depressed rural prices are disturbing rural income and weak demand is affecting the consumer goods sector.

One of the main tasks of the finance minister will be to usher in policies to boost people’s spending, buoy demand. This, in turn, will prompt companies to invest more, add capacities to meet growing demand, and eventually, hire more people.

The government should now decisively turn the focus on the vast consuming middle and salaried class to be the engines of growth. It is the finance minister’s time to go for broke and give more money in their hands through tax breaks, enabling them to spend more.

India cannot possibly be in a situation where the highest effective individual tax rate at 43 percent is nearly double the highest corporate income tax rate. This peculiar fiscal architecture needs immediate fixing. 

Village economy: Over the last two years, farmers have been protesting in several states, demanding better prices and debt write-offs. Low retail prices may be heartening to consumers, but persistently low food prices, have meant that farmers’ income has remained flat, despite the sharp spike in headline food inflation in the last two months.

India’s long slowdown in food prices may well be symptomatic of a problem of abundance.

The problem in India’s rural economy is as much about farming as it is about living off farms.

Real or inflation-adjusted income growth for rural labourers has stagnated during a time when the inflation genie had remained firmly bottled up for the most part of the last four years.

Rural labourers, particularly those engaged in fields to plough land, spend a high proportion of their income on food. A vast majority of these are landless (otherwise they would not be working on somebody else’s fields carrying out basic activities), and live on income just about enough to pay for their meals, leaving very little to save or spend on assets such as houses.

There have been occasions during November 2014 and October 2019 when India’s rural inflation rates slowed to record lows and food prices fell, implying household kitchen budgets in villages had actually come down in some months compared to a year ago.

If paying for a meal had become cheaper in some months and had become only moderately costlier in many months, why hasn’t getting by become easier for rural landless farmworkers?

The answer could lie in a continued property market slowdown. As out-of-work labourers in property sites headed home, there were now more people jostling for the same job in the fields. For farm owners, it turned into a favourable “buyers” labour market, as more people were available to do the same job, bringing down wage growth rates.

It is a classic playout of the textbook demand and supply laws. If the demand for a product (or a service) roughly remains the same, its price will fall, stagnate or rise at a slower pace if its supply grows significantly.

More people are seeking daily jobs in the rural labour market now compared to two years ago. The number of jobs available on farms for ploughing and tilling, however, does not change significantly on an annualised basis. The resultant surplus labour supply have implied that wages (the price of labour) do not go up considerably.

The budget should announce policies to raise farm incomes. But more importantly, it will have to raise find ways to draw landless labourers out of farms back to towns.

Realty and roads

The real estate industry is among the largest employers of unskilled labourers in India.

Construction activity in the property market was among the worst-hit following the currency culling and the restricted cash access, forcing many labourers employed in these sites to head back towards their villages.

While fund availability is slowly coming back in the banking system, the property market continues to be dogged by conditions of oversupply. Real estate as an asset class has lost its attractiveness, bursting the speculative bubble and chasing away the “investment purpose” buyers that had artificially inflated house prices.

Likewise, between April-October, construction activity in physical infrastructure such as roads slowed down considerably.

There was also a five-year phenomenon at work in April-June. India was in the midst of the Lok Sabha elections and with the government in transition, public spending was limited to routine expenses. Government-funded projects, particularly in roads and highways, would have slowed down during April to May, until the Narendra Modi-government took oath for a fresh term.

Accelerating road and infrastructure construction activity that creates an estimated 2.7 new jobs indirectly for every Rs 1 lakh invested with major linkages to sectors such as real estate

The onus is squarely on the government to ratchet up its spending, particularly on infrastructure projects that have strong multiplier effects. The slowdown is here. It is official. The government will now have to do much of the heavy lifting to engineer a quick turnaround

This may well be the first steps to give landless rural labourers a better wage deal. 

Jobs: The central long-run question confronting India is the need to create jobs. A productive job is the best form of inclusion. An unrelenting Opposition has spared no punches in pinning down the Modi- government’s failure to create enough opportunities for the armies of young people who join the queue of hopefuls every year.

The government has to bring about policies to create opportunities for an estimated 1.2 million young people entering the market each month will be a key challenge.

The real issue is about meaningful jobs. Everywhere in the world, the elasticity of jobs to economic growth has been coming down because of technology. It is important to look at the sectoral employment numbers. There are sectors that are losing jobs, and sectors that are adding jobs. The right question that the new government should be asking is which are the sectors that are creating jobs?

Sitharaman’s budget will have to announce policies that will encourage businesses to step up investment to create job opportunities. One can expect tax breaks and other incentives for companies that operate in sectors that the government believes has the highest potential to create jobs.
Gaurav Choudhury
first published: Jan 20, 2020 02:38 pm