A Safe Budget: But, will it catalyze revival?

Kerala budget 2020

New financial budget for 2020
The finance minister, Nirmala Seetharaman, presented the latest budget; with, six consecutive quarters showing a considerable deceleration in economic growth. The situation arises such that, there was hardly any fiscal space left for public spending, which could have revived economic growth. This makes the budget to be just safe; unlikely, to catalyze any revival.

New-Tax Policy
As is known by everyone, a good tax system is assessed through five basic conditions, which include fairness, adequacy, simplicity, transparency, and administrative ease. In accordance with these factors, while framing the new tax-policy, the central government has undertaken an interim step to move personal income tax towards a simpler framework of lower rates, but with no exemptions. For bringing co-operatives on par with the corporate sector, this same template has been extended. However, the transition is optional for avoiding unwanted disruptions.

Attracting foreign investment to finance infrastructure is done through clear tax policy. The borrowings done by the public sector have been sucking in most of the domestic household savings. Thus, attracting foreign investment becomes essential. To encourage these investment practices, sovereign wealth funds and foreign portfolio investors have been given tax concessions; this supplements domestic savings.

The central government has doubled-down its policy of raising import tariffs, with regards to indirect tax. This has been done for protecting the domestic industry.

Some comments on the new budget!
Although the new budget offers a platform for reforming multiple sectors, none of the ideas put forth can be considered as potentially game-changing. However some of the proposals illustrate a glimmer of hope. For instance, to thwart a big problem: lack of employability, the central government has proposed to urban local bodies for offering internship opportunities to fresh engineers.

Proposals have been put forth to revive horticulture and milk-processing industries. The design and implementation of these proposals should be on point, for these to work effectively and efficiently.

Reform needed for good economy
The economy has been plagued with bank bad loans and relevant related issues, which showed up in audits of NBFCs as well as co-operative banks. As a solution to these issues, deposit insurance has been increased from around 1 lakh to about 5 lakh. Although the optics are looking positive, this needs more work to bring the economy to the right track. Real reform will need a combined effect by both RBI (Reserve Bank of India) and the Central Government. This will help in improving governance in financial intermediaries. Failing this process might keep the funding allocation process at a sub-optimal level.

Government Finances
The government finances are the heart of the budget and this time around, there is a little more transparency and clarity in the related numbers. Finance Minister used the space provided by FRBM (Fiscal Responsibility and Budget Management) Law to propose a decrease in fiscal deficit from around 3.8% to 3.5%. The new budget conveys the impression that the economic challenges are cyclical.

Analyzing all the factors mentioned, it can be analyzed that the budget is safe but doesn’t have the power to catalyze a revival.

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