Finance Minister Arun Jaitley presented his last full Budget on 1 February 2018. The stock market (SENSEX) has crashed by 4.92 percent since 31 January 2018 till closing position on Tuesday, clearly signaling a big thumbs down to his Budget. Although, this crash was partly due to global cues.
Jaitley’s Budget speech was more like an election speech, full of promises and grandiose. The biggest announcements on healthcare and Minimum Support Price (MSP) were made without providing crucial details like allocation, funding, timelines, formulae etc of these schemes.
The big dampener however, was the fact that he missed his last chance to fuel the economy through consumption, which has been one of the biggest levers of growth. He has been consistently ignoring the consumption story which has been the saviour of growth so far and instead, has been relying on ‘lazynomics’.
No Steps to Boost Private Consumption
Private final consumption expenditure accounts for 58.8 percent of GDP, Gross Fixed Capital Formation (GFCF, which is a proxy for private investments) 26.4 percent and Government Spending 11.9 percent in 2017-18.
The final consumer goods spending has been relatively stable through the business cycles.
No steps were announced in the Budget to boost private consumption despite it being the largest component. India, unlike China, is not an export-dependent economy. It has a huge domestic market for each and everything ranging from a needle to aeroplanes.
This is what makes India unique and a hot destination for FDI inflows.
The classic debate – whether consumption or investment is more important for GDP growth – comes to the forefront. The Keynesian message is clear: If you want to put the economic pedal to the metal, get out there and consume. However, other economists do not agree with this and prefer investments over consumption to achieve growth.
They claim consumers don’t create jobs, companies do. Both consumption and investment are mutually interdependent and are akin to the two legs of a person which enable a person to walk smoothly. When one of the legs is injured or damaged, the other leg needs to be strengthened, so that a man can lean on the strong leg and walk properly.
A Decline in Credit Growth
On the investments front, Rs 19,000-crore relief has been provided to micro, small and medium enterprises (MSMEs) in the form of a decline in tax rate from 30 percent to 25 percent for a turnover of up to Rs 250 crore. This amount is less than 1 percent of current GFCF (proxy for private investment).
Hence, it cannot be expected to have a significant impact on overall GDP growth. On the consumption side, Rs 8,000-crore relief in the form of standard deduction has been provided to salaried tax payers.
However, Rs 11,000 crore have been taken back in the form of increase in cess from 3 percent to 4 percent. This actually acts as a big disincentive to consumption.
For the past 6 years, growth in private consumption has exceeded the growth in GFCF except in 2015-16. While private consumption has grown on an average by 6.7 percent, GCFC has grown by only 3.6 percent during this period.
India has been grappling with a twin balance sheet problem for the past few years. With NPAs ballooning, banks have not been in a position to lend to corporates.
Credit growth has been on the decline in recent years. From April 2017 to 15 September 2017, bank credit has decelerated by 1.3 percent. Financial health of many top corporates has taken a beating, many loans have been classified as bad loans, due to global slowdown, mismanagement, fraud etc. This has affected the corporate sector’s capacity to invest.
Private Consumption vs Private Investment
Despite the above, the focus of successive budgets has been on industry – roadmap of tax reduction, reduction in tax rates for MSMEs and recapitalisation to revitalise lending. The multiplier effect of consumption on industry sales, profitability and investments have been continuously ignored by Jaitley.
When oil prices declined, Jaitley, instead of passing on the benefit to consumers, went for steady increase in excise duty, a lazy tax to fund government spending.
Excise duty collections on fuel products have more than tripled from Rs 78,000 crore in 2013-14 to Rs 2.43 lakh crore in 2016-17. The extra pocketing by government amounts to approximately Rs 4 lakh crore which is equal to one year of personal income tax collections of the central government.
In 2017-18, individual income tax collections are estimated to be Rs 4.31 lakh crore. Passing this on to consumers would have acted as a booster to our ailing economy.
To conclude, the environment is still not conducive for private investments as highlighted in the Economic Survey. Banks are still grappling with their burgeoning NPA problem. Impact of government spending on growth has its limitations because of its smaller share.
In this situation, Jaitley should have focused on sops to boost consumption by providing tax breaks and/or increasing the slabs. But he missed a golden chance yet again.
(Amitabh Tiwari is a corporate & investment banker turned political commentator, strategist and consultant. He can be reached @politicalbaaba. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)