Economically & politically smart Budget that is fiscally credible

All eyes were on Union finance minister Nirmala Sitharaman as she presented the penultimate Budget of the second term of the government. With nine Assembly elections scheduled this year, and just about a year to go for the big Lok Sabha polls, was the Budget good, fiscally smart and politically sharp? TOI’s Saubhik Chakrabarti and Sanjiv Shankaran decode the Budget …Saubhik Chakrabarti: A quick take on what many pundits are already saying is a very good budget…Sanjiv Shankaran: Given the circumstances, it’s a smart budget. For two reasons. One, it did not fall into the trap of trying to do far too much ahead of elections, which is less than 18 months away. It is smart about the macro-economic parameters where they could make a meaningful change.In the personal income tax section, where they made it easier for everyone by moving to a regime where there are fewer exemptions and life is simpler for everyone.SC: Now there is very little reason for the middle class to stay in the old tax regime ... SS: Unless you are somewhere halfway through an EMI schedule of say a home loan, I don’t think there’s much of a reason to stay in the old regime.For someone entering the workforce, someone who got an annual income of less than Rs 10 lakh who may noy have invested much in some of these longer term small saving schemes, I don’t think there is a financial case to be made to stay in the old regime.SC: Talking about compliance, you had to earlier find specific investment instruments to invest to save tax, which was part of the compliance burden. That meant going to a CA etc. There were issues like figuring out what you should do if you didn’t have a home loan. All those things are now off the table. At every level, in the new tax regime, you now pay the tax incidence, the tax burden is lower. If you are office employee, your TDS is it.SS: If you are a salaried employee, filing of return becomes easy. Chance for a refund is limited. If your office has been maintaining TDS, there is not much in terms of complications.For a lot of people, the small savings schemes are risk-free and represents a safe avenue. And if you add that rebate that you got under Section 80 CC under the old regime, they gave reasonably good return.If people are going to move out of that, where will the savings go? Financial literacy in India is probably still at a very nascent stage.SC: In small savings, the quasi-sovereign guarantee remains. It is still whispering. So, the combination of that and 80 CC might not be there in the new tax regime.SS: No, it’s not there.SC: The trick is in small savings in the 7.5% & 8 % interest for girls, women and senior citizens. That’s a big change.SS: It’s a two-year scheme right now. The guarantee is there. They remain risk-free even now. Once the returns come down, it’s possible that people would go chasing higher returns. Sometimes it happens they are not acquainted with the risk that come from chasing higher returns. This is not something that’s going to show up in a year or two. I’m curious to know how this will play out over a period of time.SC: The remarkable thing about taxation is that one can’t remember the last time when any government, especially close to elections, announced a definitive tax cut for the rich. This has happened now with the surcharge on the highest income slabs coming down.SS: Last time there was a serious reduction in personal income tax across all slabs was in 1997. This is the first time in recent memory where they have actually brought down the effective rate for the people in the highest slab.SC: Politically, it’s a brave decision. It also possibly shows the confidence of the government that they do not expect any backlash.SS: I agree with you on that point if you look at the overall Budget numbers, including this change you just mentioned. It’s a Budget presented by a government that is probably very confident and reasonably sure that they would be back because even the fiscal glide path goes to 2025-26, which is a year into the next government.SC: The reason I am talking about HNIs and new HNIs is that it completely changes the politics of Budget making. Here’s a government, which is unabashedly saying that the effective top rate of income tax is going to go down. And, not just for people earning Rs 7lakh, Rs 10lakh or Rs 15lakh or Rs 20lakh, but taxes will also come down for people who earn Rs 3crore, 5crore and above. Somebody who was paying 42% tax is now paying 37% tax. That’s a big saving,SS: It is a big saving absolutely. It’s a remarkable tax change in India’s political economy. The last time I can think of a big change at the highest slab maybe quite a few decades ago.SC: Every change has been to add surcharge. This is the first time the government has actually reduced the surcharge.The other possible impact of tax change is the impact on consumption, apart from the fact that the new tax regime becomes the default tax regime. There will be more money in people’s hands. Those who are in the new tax regime gets additional money. Those who are in the old tax regime and didn’t have a home loan, would get additional money. Few HNIs will have additional money. All put together, and since consumption has replaced exports as the big growth driver in post global gloom, this is a calculated boost for consumption in this fiscal.SS: If you do choose to shift, it does potentially put more money in your hands and disposable income will go up. SC: The other big defining announcement is the big jump in capex or government capital expenditure. There’s been a 33% increase. On the face of it, a right move … just what the economy needed since private sector is still nervous. Capacity utilisation in private sector is going up but private investment is still not quite there. Therefore, the government capex as well as extending the loan scheme for states (the interest free loan scheme for capex), are actually the right moves.The question is how much of this capex will end up getting spent by the time of the next Budget. SS: This is equivalent to a textbook approach in the circumstances you find yourself in. If you take an average, about 30% of India’s GDP comes as investment, 11% of that 30% comes from the government. Over the last two years, the slack in the system in the private sector is tightening. For them to go out and invest more -- though their balance sheet has been repaired – might be still difficult. The animal spirits haven’t been unleashed yet. The textbook approach would be for public investment to step in. To that extent, this is a sensible move.SC: Sticking to the macro picture, assuming that Ukarine war goes on and inflation persists for a while, minus a massive global shock or a huge jump in commodity prices because of higher Chinese demand, India should be able to cross 6%. At this point it’s just a guess. Given the capex boost and consumption boost from income tax, 6% doesn’t look unrealistic.SS: 6% looks like a very realistic target. But the threats to all economic forecasts have come from outside domestic economy. That’s something no government can control.SC: The Budget should get a thumbs up from neutral observers…SS: It’s a smart Budget. They have not tried to do too much on the macro side simply to make sure that macro-economic parameters do not go out of control this year. That’s the smartest thing you can do in these circumstances.SC: There are always questions about assumptions made in the Budget estimate for the next fiscal year. Of the assumptions made this time is that nominal growth rate has been taken at around 10.5%. SS: That is probably the most unrealistic assumption they have made in the entire thing in the sense that 6.6% was the baseline growth rate that the economic survey forecast. So, if you stick to the fact that they are looking at an inflation rate of 4.5%, that seems to be a bit unrealistic even if commodity prices come down. We have not been able to average 4% for at least three years now.There is a possibility that total expenditure will overshoot the 45 trillion mark. The ongoing financial year overshot the 39 trillion mark. I think its going to be about 42 trillion. Simultaneously, when that happens, revenue will be higher. Both sides get adjusted.SC: If inflation is higher than 4%, just like this year, and assuming fairly robust growth, will nominal revenue growth be higher than what has been estimated for the 2023-24 Budget? SS: Even if they overshoot, since the fiscal deficit is the difference between these two, I don’t see any great deviation from 5.98. It may go up to 6 or may come down to 5.8. Last year, when they had to overshoot, the fiscal deficit as a proportion of GDP remained 6.4, in today’s forecast for 2022-23.SC: Therefore, even on Budget numbers, finance minister Nirmala Sitharaman has done a fairly honest Budget maths ... SS: They have stuck to a fairly honest Budget maths. Even if we say the nominal GDP seems a bit unrealistic, it adjusts on both sides. The essential number, i.e. fiscal deficit as a proportion of GDP, does not change. We should expect 5.9 to be a realistic target with the caveat as long as nothing really spectacular happens in the negative sense in the global economic scenario.SC: Going back to the politics of the Budget, the interesting thing to note is that the government started contrary to expectations, when they first came in with a massive emphasis on the poor and low income groups. The welfare schemes, the direct benefit transfers, the PM Kisan, PM Awas and other yojanas were highlights of the last 8 years.This time, it has made a conscious effort and made an outreach to a numerically small segment in terms of voting population -- the middle class. Another outreach has been the numerically almost insignificant rich. It shows tremendous political confidence when the entire opposition is ready to jump on you by labelling you “suit boot ka sarkar”. They have enough political capital to reach out to what is the semi-voting or non-voting class.SS: I don’t think they are in a political situation where they have to postpone something or not do something that may make them apprehensive of losing votes.The political signalling seems interesting. It is more aimed at assembly elections, states that are going for elections. This is what most people discuss … that BJP is more vulnerable in an assembly election than Lok Sabha election because of the CM-is-not-the-PM kind of situation. There was some signalling for central Karnataka simply because it is an important area for BJP in terms of its electoral calculations. Three states from the NE will also be going for elections. And in terms of the Budget speech, there was a lot of signalling to the farmers as they had a bit of problem when the farm laws were introduced.SC: There is also a big upgrade in schemes for tribals, which is another very important constituency that the BJP nurtures ...SS: It’s a social constituency and Congress, at one time, had a fairly tight grip on it. BJP has dislodged them quite a bit already. Probably here is the final push.SC: It’s in many ways a rare Budget, which is economically smart, politically smart and fiscally credible ...SS: The last point is very important. There were many Budgets in the past that were politically smart in terms of aiming at social blocks that the finance minister’s party was trying to please or appeal to. There have been good moves that never fructified or lived up to their potential. But inevitably, many of them were let down by a fiscal looseness which had consequences across the board.Here, they have been smart fiscally. This year, and last year too, they have not tried to do too much. This is also probably intertwined with the political confidence they have that they feel they need to spend their way into another victory.SC: Massive increase in capex includes big outlay for railways and roads. This has been the biggest outlay for railways. The theory says they should have a beneficial employment effect, as employment or lack of jobs is a conversation that keeps happening. It’s been going around now for almost the entire term of this government. Two consecutive years of big capex, even if execution is not perfect, should start showing up in employment. SS: Not so sure about that, simply because there are some structural changes that are happening in the world and I don’t think anyone has got a sense of that. India, primarily through automation, adjusted for inflation. About 30 years ago, every crore of investment was getting about 30 jobs but now its down to barely 7 or 8. I think that number is not going to change.SC: That is about private sector manufacturing. I’m referring to a typical government capex and that’s why I mentioned roads and rails. These are more labour intensive than, let’s say, producing a mobile phone where automation has had a huge impact.But if you are spend thousands of crores on roads and rails, it should be able to generate employment.SS: There will certainly be a positive employment impact. There are some indirect jobs too that are created from this. The question is: For every extra GDP that you are getting, how many jobs can you create? There is a longer terms problem not just in India but in many countries now.SC: There is another point that has both to do with this government’s philosophy of Make In India as well as its view of customs duty. This year, they have actually reduced many customs duties on inputs that are required to make consumer goods and other products in India.SS: There have been some customs duty reductions. That’s the impression I got from the speech. She mentioned mobile phones, camera lenses, where they are trying to increase the value addition in India. This is good but, given the nature of technology and the complex interlinkages in production, we should just go back to a general reduction which was the long term aim. SC: One sub-optimal approach this government had is to micro manage customs duty instead of putting its faith in reducing customs duty across the board an make India generally a more attractive place to manufacture,SS: As a policy, when you start tinkering with just a handful of duties, it inevitably leads to more lobbying. They have gone through this in the past where lobbying determined a lot of indirect tax changes.SC: For the chattering classes or for the section of India that pay some attention to the Budget which is the middle classes and the upper middles classes and the rich, this is the first Budget since 2014 that can make them happy. SS: This is the first Budget that would put more money in their pockets.SC: This is the most interesting political economy lesson from this Budget. If you are confident otherwise, you can even help the relatively better off. You don’t need to hang on to the mantra of ‘garib kalyan’. It is necessary but you don’t have to ignore the rich.The other reading of this is that there is probably a recognition that the size of the middle class in India is increasing although it is not a numerical majority just by your 5-6 % growth. This Budget takes a call that it is necessary to make the middle class a part of the political and economic policy.SS: There are more than 60 million people who are filing returns. Many do not pay taxes because their income is not at the level that they would have to pay tax. I think this is a far sighted move as this provides some stability in the personal tax regime, which is important as more people would come into the bracket. And many of the 65 million who are already filing returns that number will increase. We are looking at a fairly substantial population in the next 5-10 years period which will benefit from this.SC: This is also in a recognition that the middle class bracket will bulge, urbanisation will bulge. Therefore, the India that finance ministers traditionally used to think of -- which is essentially refracted through the glass of rural poor and farmers -- remains but they have consciously added the so far ignored middle class.This will increasingly become a larger part of not only the economic but also political story.SS: Yes. The last time we had a big cut in personal income across all slabs, the PM was from a relatively non-urban elite background, HD Deve Gowda. SC: That was a minority government in 1997. But that government did not behave as if it was coming back to power. That government didn’t even know that it was staying in power. SS: It was a minority government but he was willing to take that big leap of faith.SC: This budget is by a government that is clearly very confident of coming back to power in 2024. It’s very clear in their approach.A lot of this goes back to the acute political sense that the Prime Minister has of what is happening. This was a big change – tax relief for middle class, tax change for the rich. There are big political calls, those calls wouldn’t have been possible had the PM not signed off.SS: I would look at every Budget in a political context because it’s a political economy statement. It’s about looking at Budgets as part of fiscal policy which decides expenditure and taxation to influence an economy. At the end of the day, it has to be sold politically and in this government it’s the PM who is by far the most popular politician in India who will be at the front and centre of any policy that has to be sold politically.I would say this is largely his stamp on the way he thinks we should go.SC: We can summarise by saying that this is the first Modi sarkar budget that clearly signalled to the middle class that we take you very seriously.SS: I think so. This is where they have signalled that you are very much part of our plans. We are more than just a welfare model. We are also looking at growth and aspiration.Audio production: Sahil Gupta