Can the Union Budget of 2020 help the Indian economy in its $5 Tr target?
Simple answer. NO
Another important question to answer is: Has the Budget excited the markets?
The markets closed 988 points down; investors lost INR 3.5 lakh crore within the remaining hours of trading on Budget day.
This brings us to the crucial questions: Will this Budget halt the slowdown in the economy this year?
Is the 2020 Budget going to excite the markets and drive the economy towards an 8% plus GDP growth? NO.
Does the 2020 Budget lay a foundation that could improve the growth rate going forward from FY20-21? YES.
The difference between a dream and an ambition is a plan with a date. For India to reach a $5 trillion economy, there has to be a clear annual action plan with each year having clear quarterly goals. The country needs policies in place to support that plan.
Is there clarity of a clear roadmap to make India a $5 trillion by 2024? NO.
Here is the challenge not answered by Budget 2020:
The magic of compounding works both ways. It can take you up, and it can bring you down fast.
Let me explain.
If India has to reach a $5 trillion economy, its GDP will have to grow at 10% plus, EACH year, between 2020 and 2024. Every year it delivers LESS than 10% means the next year it will have to ADD the missing rate to the existing target of say, 10%.
So, if India’s GDP grows at 5.8% in FY20-21, the next year in FY 21-22, it will have to grow at 10% + 4.2% = 14.2% to make up the shortfall. And so, each year, the target will keep adding. In the case of a country’s economy, that not possible. Not even for China.
Let’s look at India’s GDP growth rate since 2014, as per IMF.
- 2014: 7.3%
- 2015: 8%
- 2016: 8.2%
- 2017: 7.2%
- 2018: 6.8%
- 2019: 6.1%
However, in comparison to the growth rate of other competing nations like China, Brazil, Indonesia, Turkey, and Russia, India is well placed to remain ahead of the pack, assuming it continues to stay steady on a positive growth trajectory.
To reach a $5 trillion economy by 2024, India needs radical reforms to:
- Raise revenue significantly
- Increase credit flow
- Create domestic demand
- Build infrastructure rapidly
- Generate high paying jobs
- Increase social spending
- Increase agriculture incomes and output
- Increase health infrastructure
- Increase spending on research
- Step up PSU disinvestment
- Step up Judicial, Police, Land, and Labour reforms
- Improve global engagement
Now let’s look at some of the above and see what the Budget misses for the country to reach its $5 trillion dream.
Challenge #1: Raising revenue
The economy is on a downward slide, and the government’s first objective is to halt the slide and then begin to step up the growth.
The government has revised the fiscal deficit target for FY20-21 to 3.8%, from 3.3% in the current fiscal. The target for FY21-22 is 3.5%. The government is pegging its bets on raising revenues through disinvestment in PSUs, through 5G spectrum sales coming up, and continuing the upward trend in GST collections.
The current fiscal target is INR 1.05 lakh crore, and the revised estimate is pegged at INR 65,000 crore. The target for the next fiscal is Rs 2.1 lakh crore. The government is betting on the big bang IPO listing of LIC, expected to make it the most valued company, ahead of RIL and TCS. Later, it plans to list IDBI, among others. However, the problem of FCI’s outstanding remains an unresolved burden.
The problem with LIC is its massive non-performing investments made on other PSUs, on government orders. The inevitable deep dive by investors and regulatory authorities is likely to reveal uncomfortable facts and is expected to weigh down valuations for LIC. It will have an impact on the IDBI stake sale as well, as LIC holds a significant stake in IDBI.
The last three months have shown GST collections crossing the INR 1 lakh crore mark, but will it continue to improve each month going forward is an open question.
The corporate bond market needs to open up, and the government’s move to raise the FPI limit in corporate bonds from 9% to 15% will help.
Challenge#2: Generating consumer demand
Demand rises when consumers have disposable income.
The proposed optional income tax regime may not generate enough savings if at all, to trigger a significant increase in spending.
Increasing rural incomes is needed to spur the economy on a higher trajectory of growth. The government is sticking with its plan to double farm incomes by 2022 and is basing it on the new 16 Point plan to boost the rural economy.
The plan itself is good as it approaches a wider problem area, but the benefits of its implementation will begin to show only in FY 21-22 and so much in FY20-21. Besides, the government has not addressed the most significant problem – reducing, if not removing, the margin of the middle man and transferring the benefit to the farmer.
The rural spending will take a hit as expenditure on MNREGA has come down.
By increasing its investment in research and development in Defence, India could create a large number of jobs. India is the second-largest importer of arms and investment in research, and building up the domestic manufacturing capacity can trigger the economy. But capital expenditure outlay is only marginally higher than the previous year with little room for research and development.
Challenge#3: Creating jobs
Significant investments in the health sector (INR 69,000 crore) will boost the creation of jobs but is not enough to power the growth needed.
Sectors like infrastructure require well over three times the existing investment to keep the economy in contention for the $5 trillion target.