The Budget 2020-21 received mixed reactions. While some steps have been taken to restore business and consumer confidence, there are no big bang announcements. As a 1.37-billion-people economy, the budget fails to realise the power of consumers. If the consumer demand is low, as it is now, businesses will be reluctant to invest. While the budget offered some relief to personal income tax, the tax payers have to compare the reductions in the new tax slabs against the exemptions they are already receiving. Analysis of the returns filed by the tax payers will confirm which of these models they prefer to choose.
In India, consumer demand cannot be boosted by income tax relief alone as less than 10 percent of the working population pay income tax. This is extremely low compared to other developing countries such as Vietnam, the Philippines or South Africa, where the share of tax payers is around 58 percent, 26 percent and 23 percent respectively.
India has not been able to put in place a system of formalising sectors such as retail, which is leading to revenue losses. Around 46 percent of the workforce is in the agriculture sector and rural consumers play a key role in boosting demand. The rural sector also has huge income inequality. While rich farmers are not taxed, small and marginal farmers and landless workers are unable to spend due to lack of earnings.
The Budget speech referred to schemes that will encourage manufacturing of mobile phones, electronic equipment and semiconductor packaging and facilitate private sector investment in data centre parks. However, one has to carefully examine these schemes.
On October 31, India lost the case against the United States for giving a number of WTO prohibited subsidies and two key schemes that were challenged includes the Electronics Hardware Technology Parks (EHTP) scheme and the Special Economic Zones (SEZ) policy. Thus, in any case, India has to phase out the old schemes and bring out new schemes. To attract investment, India should have a clear and transparent WTO-compliant subsidy regime.
For small and medium enterprises, the simplified system of GST filing, if properly implemented, will be beneficial. While a number of MSMEs and start-ups have registered in government e-market platforms, a survey-based study conducted by the author found that public sector enterprises and government entities are sourcing from large companies. In many government contracts only global companies and the Big 4 are eligible.
There have been incidences where MSMEs and start-ups were part of a consortium, which won the bid for a project, but were soon dropped by the lead partner in discussion with the government agency even before the project started. It is, therefore, important to reserve a value of the government contracts for MSME/start-ups and have a robust project-monitoring and detailed tracking system for the MSME engagements. For start-ups, the budget offered early life funding including seed funds, but one has to see how many start-ups will actually get the benefits.
The budget increased the custom duties in certain products. The recent tendency to increase custom duties has been a key reason why India had to walk out of the Regional Comprehensive Economic Partnership (RCEP), after a decade of negotiations. Tariffs on goods for final consumption are weak instruments of import control, unless it is backed by a good quality control regime. Higher tariffs may shift purchases to lower quality imported products, but not necessarily reduce imports. In a globalised world, companies want to test market their products before investing and high tariffs act as a major deterrent to such investments.
In agriculture, the reduction in fertiliser subsidies and subsidising organic inputs is a good move. However, a survey of 500 farmers and organic companies by the author showed that they do not have access to quality organic inputs. Further, fertilisers banned in a number of countries are subsided and sold in India. There is a restriction on imports of key raw materials, seeds and ingredients. When a farmer converts her land to organic farming, in the first three years there is a reduction in yield. If the farmer goes through a third party certification process, which is expensive but is mandatory for exports, she does not receive any subsidy for the yield losses unlike farmers in countries such as the United Kingdom.
There is no financial incentive for an organic farmer to be a part of the global value chain, in spite of India having the largest number of organic producers. In India, only participatory guarantee system (PGS) is subsidised but the Agricultural and Processed Food Products Export Development Authority (APEDA), the nodal export agency, does not allow the exports of the PGS produce. Thus, there are many roadblocks to doubling the income of farmers in a high price produce such as organic products, and these roadblocks have to be removed.
Overall, a budget alone cannot restore growth or consumer confidence. The gaps have to be identified, budget announcements have to be implemented and supported by right polices, funds, schemes and programmes. It is also important to study the impact, of decisions, for example, how income tax payers have reacted to the two options that have been offered.Arpita Mukherjee is Professor, Indian Council for Research on International Economic Relations (ICRIER). Views are personal.