Another lost opportunity to revive growth

The Union Budget this year was presented in the background of a slowing economy, poor investment climate, declining consumption demand and stagnant exports. It was hoped that the strong electoral mandate that the government had received in 2019 would propel it to embark on substantial structural reforms to reverse the trend and revive the investment climate to accelerate growth.

In fact, the Economic Survey that preceded the Budget presentation declared, “The government must use its strong mandate to deliver expeditiously on reforms, which will enable the economy to strongly rebound in 2020-21”.

Alas, that has not happened. In fact, there is a complete disconnect between the Economic Survey and the Budget. There is no measure to create wealth in the Budget, as propounded by the Survey, nor is there anything to generate an atmosphere of trust.

Watch | Highlights of Union Budget 2020-21

A disappointing speech

The Budget speech read out by the Finance Minister was perhaps the longest in history, running to almost two hours, until the Minister herself could not carry on any longer. However, the markets were not impressed.

Almost two-thirds of the Budget speech was devoted to subjects that come within the constitutional domain of the States and, in the remainder, there was not much to cheer about.

Watch: sector-wise highlights from the Budget

The response to even issues such as the abolition of dividend distribution tax, which otherwise should have been received well, was muted. There was endless wait, with a fond hope that some important announcement would be made over the long duration of the Budget speech, only to end in disappointment. The slippage in fiscal deficit from the target set in the Budget estimate in 2019-2020 was a foregone conclusion. This is mainly due to: the nominal GDP growth being 7.5%, as against the estimated 12% in the Budget; the expectation that the tax revenue was to increase at 18.3% over the pre-actuals of the previous year; and, lastly, the progress in disinvestment being tardy and that only about ₹18,000 crore of the budgeted ₹1.05 lakh crore has been realised so far.

It is not surprising that the fiscal deficit for the current year stands estimated at 3.8% of GDP and the target for the next year is 3.5%. Thus, the slippage for both the years is 0.5 percentage point to GDP. Of course, off-Budget financing has continued and that makes the reported deficit numbers somewhat of doubtful validity. Besides, there are questions on whether even these estimates will be realised when the actual numbers are finalised.


It remains to be seen whether the total estimate of ₹65,000 crore of disinvestment proceeds will be realised, which implies that the government will have to fast-track disinvestment to collect ₹47,000 crore in the next two months. Besides, the revised estimate of tax revenue for the current year is over 14% higher than the actual for 2018-2019, perhaps predicated on the hope that the scheme, “Vivad se Vishwas”, of allowing the settlement of disputed tax to be paid without interest and penalty.

There are downward risks in achieving the targeted fiscal deficit of 3.5% in 2020-2021 as well. The nominal GDP growth looks reasonable but it is not clear how the other non-debt capital receipts will be realised.

The capital expenditure is estimated to increase by 18%. Despite this, the revenue deficit is higher at 2.7% of GDP as compared to 2.4% this year and is almost 77% of the fiscal deficit.

Echoes from the past

The abolition of dividend distribution tax and taxing it in the hands of the shareholders at applicable rates was expected. In fact, there has been considerable zig-zag on dividend taxation policy over the years. The reforms in individual income tax, however, are clearly disappointing. The best practice approach to tax reform is to broaden the base, reduce the rates and reduce the number of brackets to make it simpler. Clearly, the main objective of any tax should be to raise revenue.


The government could have simply phased out the tax concessions, indexed the brackets for inflation and reduced the rates of tax, with appropriate adjustment in brackets. Instead, it has created six brackets which takes us back to the pre-1991 era of income taxation. The protectionist stance for import substitution in the name of “Make in India” has also continued, which too takes us back to the pre-reform era.

Drop in revenue expenditure

On the expenditure side, there has been a sharp compression of revenue expenditures by 4% and the capital expenditure is shown at 3% higher in 2019-2020 over the previous year.

Much of the compression in revenue expenditures was in the Central sector (12%) and Centrally sponsored schemes (4%). In 2020-2021, the revenue and capital expenditures are estimated at 12% and 18%, respectively, higher than the current year.


Despite many announcements in the Budget on schemes relating to subjects in the States’ domain such as agriculture, irrigation, rural development and health, the expenditure on the Central sector and Centrally sponsored schemes is budgeted to increase at 7.6% and 7.3%, respectively, next year.

In other words, a considerable part of the expenditure compression in 2019-2020 was borne by the States, and while the overall expenditure of the Centre is budgeted to increase by 12.7% next year, the increase in the transfers on account of the Central sector and Centrally sponsored schemes would be just about 7.4%.

On the whole, the Budget fails to provide any kind of stimulus for the revival of consumer or investment demand. Nor has it been able to contain the deficits and that leaves very little room for further cuts in repo rates by the monetary policy committee.

The Budget is also supposed to provide clear policy signals. Mere announcements that there will be a doubling of farmers’ incomes and there will be ₹102 lakh crore investments in the next five years are not likely to revive the sentiments.

In short, the country has missed yet another opportunity to retrieve the economy from the throes of stagnancy.

M. Govinda Rao is Counsellor, Takshashila Institution

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Printable version | Mar 8, 2021 11:18:31 AM |

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