Union Budget 2020-21: Fiscal Discipline over Big Bang Reforms
The Union Budget 2020-21 did a fair job in terms of providing a balanced budget with focus on rural income and reviving the investment cycle in corporate India. One also has to take into consideration that the Budget comes under very difficult circumstances for the Government under the backdrop of slowing domestic as well as global growth, thereby constraining its revenue receipts. Though many market participants desired that the Government loosen its purse strings in-order to revive the economy, the Government chose fiscal prudence as against the short-term populist measures. If the Government would have adopted policies such as substantial tax cuts for the individual tax-payers, increase in investments for infrastructure, capitalization of PSU Banks etc. it would have certainly led to short-term spike in equity markets. However, the lack of fiscal prudence would have meant a possible de-rating or negative outlook by global rating agencies. In the current scenario, when the Government is looking to deepen the bond market (FPI cap increased from 9% to 15% and NRIs to be allowed to invest in certain schemes) it would have acted as a strong headwind. Therefore, the Government decided to adopt fiscal prudence for the long-term benefits, rather than a quick fix for the economy
Further, it is evident that the Government is consistent with its thought process of trying to provide more capital to corporate India in-order to simulate growth. The tax cuts for existing and new manufacturing companies (announced in September 2019), abolishing DDT and deepening of bond markets are policies which are aimed to simulate incremental investments, build new capacities and thereby promote growth over the long-run.
Though the Government has been kind to Corporate India over fiscal 2020, there have been no reforms to directly reduce tax for individual tax-payers and thereby drive consumer demand. On this front, the Government seems to have taken a stance that growth through capex and increasing capacities of companies will be much more holistic and inclusive for the economy than the growth brought about by reduction in individual tax rates. Also, only ~4% of Indian population files Income Tax Returns (ITR). So, the reduction of income tax rates for 4% of the population is unlikely to have multiplier impact on the economy over the long-run. Perhaps, the reduction in interest rates through monetary policy can have a more significant impact on consumer spending . Though the RBI has reduced repo rate by 135 bps from February 2019 onwards, the same has not been yet been transmitted by the banks.
To sum up, the Government has rightly exercised restraint and decided to adopt reforms which will benefit and strengthen the economy over the long-run rather than adopting quick-fix measures, which could have led to negative long-term impact due to fiscal indiscipline.