Budget 2020: Trust deficit then, trust deficit now

Arvind Chari 

The Economic Survey released on January 31, a day before the Budget, stressed on two important points.

"India's aspiration to become a $5 trillion economy depends critically on strengthening the invisible hand of markets together with the hand of trust that can support markets," the Survey said.

I would argue that at the current juncture, more than anything else, the country, its citizens, the business and the markets would expect the government to provide ‘A Visible Hand of Trust’.

There is a trust deficit prevailing in the country and it emanates from across segments -- trust in the actual fiscal deficit situation, the government’s national statistics, trust of the business community and entrepreneurs in the government’s intention of freeing up myriad policies that restrict them and trust of citizens in the government’s social policies which may even impact business sentiment.

The Budget, of course, may not be relevant to all of these, but there was indeed hope that the government will try to address at least a few of these issues. Alas, that was not to be.

We usually expect way too much from the Budget from a policy reform perspective and are often left disappointed. Given the backdrop to the Budget announcement -- slower economic growth, falling consumption, low wages and income and  increasing unemployment -- the expectations of the government providing some form of growth stimulus were not unwarranted.

Many had openly argued that the government should not worry about meeting the fiscal deficit and should loosen its purse strings to revive growth. The expectation was also of the government boosting confidence and reviving sagging trust, especially among India Inc and the stressed segments of the economy.

The finance minister did not mention the low GDP (gross domestic product) growth and the general economic condition in her speech, but did relax the fiscal targets by a good 0.5 percent of GDP. The equity markets do not seem to have taken anything positive from that, as reflected in their sharp fall.

The economy requires a push from the government to increase farm incomes, rural wages and broader rural spending. The NREGA, the flagship rural employment programme, has seen a cut of Rs 100 billion in FY21 over FY20. PM-Kisan, the farm income support programme, was not fully utilised this year and the rural roads and housing projects have seen marginal increases. The boost to consumption, which was anticipated, is very unlikely, given the expenditure allocations. This is disappointing.

The other stressed sector of urban real estate also hasn’t seen any major support, apart from the measures already announced. The revival of real estate sales and construction activity is important not only from the perspective of the financial sector, but also because of its large scale implications for rural employment and wages.

The slowdown in house building has seen workers migrating back to rural India and depressing wages there. The urban real estate sector is facing a trust deficit, halting money flow into the industry, and it is in the government’s larger interest to revive the sentiment that will help boost growth.

The aspect of putting more money in the hands of the common man and the middle class tax payer to boost consumption also seems to have got embroiled in complexity. The multiple income slabs further add to the confusion and if at all, the only benefit of this will be to accountants and tax consultants in earning higher fees from taxpayers.

Individual investors in the equity markets in the top tax bracket will actually see an increase in their tax outgo as the government chose to abolish the Dividend Distribution Tax (DDT) and instead will tax dividends in the hands of the individual with the tax to be paid at the respective tax slab.

The sharp fall in stock prices of insurance firms, asset management companies and real estate lenders and firms may be attributed to a large extent to these changes in individual income and dividend taxation.

The bond market, though staring at yet another period of lack of fiscal consolidation, may still look at the few positives on offer. That the government increased the fiscal deficit for FY20 to 3.8 percent from the budgeted 3.3 percent of GDP, but still did not announce any market borrowing, should see bond yields fall in the very short term.

Also, despite the fiscal deficit for FY21 budgeted at 3.5 percent as against the proverbial goal of 3 percent, we may see the bond market taking that in its stride, subject to the following positives playing out as expected:

- Inclusion of Indian government bonds in foreign bond indices

- Utilization of the increased corporate bond limit for foreigners

- LIC disinvestment goes through

- RBI continues its Operation Twist

The trust deficit in the government’s fiscal accounts though remains.  Despite the government coming out clean on the extent of extra budgetary resources used to fund its fiscal accounts, which is good to see, the fiscal accounts continue to be dogged by some dubious and egregious assumptions.

The direct tax assumption for FY20, two months from now, is estimated at a level which seems unreasonable. This continues the practice of earlier years of showing higher than possible tax assumptions for the current fiscal, which then puts the next fiscal year’s revenue assumptions as reasonable from a year-on-year perspective.

Overall, we believe that the Budget still falls short of reviving growth, boosting sentiment and improving the trust deficit.