If one was looking for a sense of urgency, a bunch of big bang announcements and bold ideas in the Union Budget 2020-21, then it came as a disappointment. Given the economic slowdown and a sense of despondency enveloping virtually every sector, one would have expected major reform initiatives to boost growth, consumption and investments. However, Finance Minister Nirmala Sitharaman was anything but aggressive, preferring to opt for a more moderate and incremental approach. On the much-touted reforms in the personal income tax, it was more of tweaking the structure than offering any big relief. By increasing the number of slabs and making the new tax structure optional, the government has created more confusion than simplifying the taxation system. No doubt, she had a difficult task on hand of balancing the imperative of growth revival with the need to keep the macroeconomic stability intact. Given the harsh fiscal reality, the space for spending for FY21 is rather limited. Big push for infrastructure, farm sector, electronics manufacturing, abolition of Dividend Distribution Tax (DDT), deepening the bond market, disinvestment of Life Insurance Corporation of India (LIC) and protection to businesses from tax harassment are some of the key features of the budget. However, there was no big reform idea to reinvigorate the growth cycle. The fiscal deficit target has been revised from 3.3% to 3.8% by relaxing the Fiscal Responsibility and Budget Management (FRBM) norms. But, this will result in only a marginal increase in government spending and would not be able to push the economy to grow at the expected rate. The question whether the economy will grow at 6.5% depends on the level of confidence that the government’s measures can create among the investors and consumers. At present, there is a negative sentiment because of divisive political climate prevailing in the country. Despite this, Sitharaman has pegged the nominal GDP growth rate at 10 per cent for 2020-21. Privatisation of Railways, liberalisation of agriculture, consolidation of banks and selling a part of government stake in LIC through IPO route must be seen as attempts towards making the fiscal accounts prudent.
The cuts in personal income tax are too small to make any difference. The government expects to forego only Rs 40,000 crore annually from this measure while last year’s corporate tax cuts cost Rs 1.45 lakh crore. The Budget has failed to lift the investor sentiments as reflected by the behaviour of the stock market. No sops were offered in the Budget for automobile and real estate, the two sectors that have the potential to create demand in the economy and help arrest the slowdown. The markets were expecting big measures to stimulate consumption. Investors were hoping that the government would do away with the long-term capital gains (LTCG) tax on equities and mutual funds. The hope was that in view of the prevalent market mood, the Finance Minister would either roll back the tax or at least extend the holding period norms. But, it was not to be. On the rural side, the expectation was that non-farm employment would get a leg-up through higher allocations to the MNREGA and flagship infrastructure schemes such as the PM Awas Yojana and PM Gram Sadak Yojana. But, these programmes got only modest increases in the Budget. Constrained by fiscal deficit target, the government cannot afford to go for big spending. While a new tax regime with lower tax rates has been introduced, the removal of all exemptions, including Section 80C exemptions, will water down its benefits. On top of it, the option to choose between the old or new income-tax regimes will complicate filing tax returns, which was already a complicated process for individual taxpayers. The government will forego Rs 25,000 crore revenues by the abolition of DDT. This is the icing on the cake for the corporate sector, which was handed out a major corporate tax rate cut in September last year.