Expectations were high as the economy is at a low. The expectation was that the demand side would be looked after and liquidity in the market would be induced by giving people more cash to spend so that the demand and supply equation in the economy could be balanced. The second budget presented by Finance Minister Nirmala Sitharaman was a marathon 160-minute speech, arguably the longest ever budget speech in the history of our Parliament, but at the end of it the viewers felt disappointed. The detail clearly was in the expectations built around it after the massive corporate tax cut in September last year.
All eyes were on the expected cut in personal Income Tax rates. There was a cut, but to the dismay of the middle classes, it came with a rider. Without the help of chartered accountants it will be difficult for a common taxpayer to understand what and how they are going to be benefitted. Tax consultants are now back in business as people would want to know which tax “regime”, the older or the new would be beneficial to them. The expectation was that the Finance Minister would take a bold step with fiscal deficit, boost spending in infrastructure, drive consumption, and cut taxes on capital gains.
The expectation was that Sitharaman would indeed cut rates, but within the existing three-rate slab structure. Instead, what she has given us is a seven-slab structure for those willing to forego tax deductions. The surcharges remain. To apply balm, Sitharaman did mention that taxpayers are highly respected and for them there soon will be taxpayer charter. However, there was not a word on what the government was doing to increase its income tax base.
Under the Dividend Distribution Tax (DDT) scheme introduced by P Chidambaram more than two decades ago, companies paid DDT on distributed dividends, thus paying taxes both on profits and dividends. On the other hand, people who were not required to pay taxes had to do so indirectly (with the company paying the DDT). DDT is now gone, and the dividend is taxable in your hands at your appropriate tax bracket. The markets were probably disappointed by this since they wanted dividends to be completely free from tax and this could be one of the reasons why the Sensex tanked 988 points and Nifty by around 300 points.
Creation of jobs is another area of concern. Amid a chorus of criticism by opposition parties over lack of employment generation, the Union Budget presented on Saturday estimated that more than 2.62 lakh jobs are likely to be created between March 2019 and March 2021 in various organisations. But, is it enough in a country of 1.3 billion people?
Sitharaman believes that an additional Rs 1.45 lakh crore from disinvestment alone can be generated. However, if one would recall the Modi government during 2019-20, had set a disinvestment target of Rs 1.05 lakh crore and could only manage to raise just Rs 65,000 crore. Sitharaman has announced that Life Insurance Corporation will be listed, and that is probably going to be the single biggest source of divestment funds. The other could be Air India.
The Finance Minister has made several announcements in the past on steps to revive the sagging economic sentiment and reverse the slowdown, but the budget she presented for 2020-21 could only manage to disappoint several common people.
Finance Minister Sitharaman had an excellent opportunity to use Budget 2020 to stimulate demand, both for consumption and investment, which at the moment seems missing. In fact, we will only get to know in the next financial year the after effects. There were no quick-fixes and now there is enough opportunity for mid-course correction. The Finance Minister was also in a comfortable position because there was a broad consensus, even among conservative economists, that it is fine even if one misses the fiscal deficit targets for a couple of years. The gap between what the Survey promised and what was delivered probably explains most of the market’s gloom.
