Union Budget 2020-21 was presented at a time when India is experiencing the worst economic slump in years. The indicators on all fronts — consumption, investments and exports — have been the weakest in a decade.
At a broad level, the Budget, along with some steps taken earlier, tried to address the issues. The biggest move — income tax cuts — it is hoped would boost consumption, and the corporate tax cuts would address investments. However, there are key limitations to these efforts, which, unless supplemented by other measures, would fail to give intended results.
Take consumption, which makes for the largest share of the economy, at about 60 per cent of gross domestic product (GDP). Finance Minister Nirmala Sitharaman cut income tax and introduced new slabs to give a relief of Rs 40,000 crore to individuals.
This is likely to nudge salaried people to revisit their spending preferences and make those decisions that they have held off due to slowing incomes, especially in terms of auto and consumer durables. However, to think that the tax cuts would boost consumption immediately would be overoptimistic.
“While millennials would benefit and are more likely to increasing their spending, the older generation would in general refrain from doing so,” said Neeru Ahuja, partner at Deloitte.
Millennials are more likely to opt for fewer tax exemptions, too. So, the tax cut may help in ramping up consumption, especially in goods and services that the youth consume. Growth in consumer spending has dropped to a multi-year low of 5 per cent in 2019-20, according to Advance Estimates. But there is a worry that the consonant increase in customs duties would do harm to the potential consumption spree. The Budget fine print shows that import duties have been increased on about 400 items, and mostly on consumer goods.
Though the reason for this decision is to encourage Make In India, it can have the opposite impact when it comes to consumption. Imports have contracted by 8 per cent this year, fastest in almost a decade.
Avinash Tripathi, who teaches economics at the Takshashila Institution, said that the impact of tax cuts looks uncertain. “This Budget had two objectives. First, to put money in the pockets of individuals. Second, to simplify the taxation system in order to reduce compliance cost, confusion and uncertainty. At first glance, neither objective has been achieved, and the net effect is ambiguous,” he said.
In terms of investments, capital expenditure has been ramped up by 18 per cent, to Rs 4.1 trillion. Spending on roads and railways has been increased, or kept steady, to help raise capital expenditure. This is likely to nudge private players to initiate new projects, but with a time lag, said experts.
Automobiles is one sector that is going through a record slump, with sales falling consistently, and a drop in new plants and investments. The Society of Indian Automobile Manufacturers (Siam), the apex body of auto players in India, expected more from the Budget. “Our demands for incentives-based vehicle scrapping scheme, allocation for diesel buses procurement and zero Customs duty for lithium-ion batteries doesn’t seem to have been considered,” said Rajan Wadhera, president at Siam.