When Santa Wore A Red Sari

The Budget oration of the finance minister and the confidence with which she delivered it, along with the measures and the recent upsurge in the economy would all contribute to unleashing the storied 'animal spirits' and help the economy run on the growth path quite smoothly.
Or so the government hopes, notes Shreekant Sambrani.

Between 12:06 pm and 12:26 pm on 1 February 2023, the Bombay Stock Exchange Sensex rose nearly 1 per cent.

Ms Nirmala Sitharaman, India's finance minister, started the delivering the B part of her Budget 2023-2024 speech (which contains details of taxation and concessions proposed, as also the overall financial picture of the country) at 12:06 pm and concluded her speech at 12:26 pm.

Sensex is considered to be a rough barometer of people's response to the Budget proposals.

Therefore, the rising index could be taken as an indication of the positive reaction to the Budget proposals.

Since the Sensex jump was relatively large, it could even be interpreted as perception of early arrival of the festive season!

Of course, such euphoria does not generally last long, as we begin to absorb the details in the fine print and the initial surprise wears off, however pleasant it may have been.

The Sensex started declining shortly thereafter, and stands just one-quarter of a percent above at the end of the trading day.

That is still creditable, given the recent turmoil in the share market following the Hindenburg expose of the Adani enterprises.

That raises two questions: What is it about the Budget that at least initially excited the punters and investors; and does the Budget help steer the Indian economy in the currently turbulent global environment.

What is cheering about the Budget

There is a whole host of nice things in the Budget, but what brought the most cheer to the people is the rationalisation of personal income taxes.

If you opt for the new regime, that is, forgo various deductions and setbacks, incomes up to Rs 7 lakh a year are now tax-free.

The income slabs have been reduced to five from the original six and the applicable rate in each slab has been reduced.

There are also other, smaller, concessions which bring a little relief if the capital gains are invested in housing, the process of assessment and refund granting has steadily improved and the finance minister promised to improve it further.

So it is not just the size of the bite that is reduced, but also it will be less painful.

The Budget overall numbers also bring some smiles. Not only has the economy performed well in the year about to close, it is helping the government meet its deficit target of 6.4 per cent of GDP.

Tax buoyancy in the wake of the surging economy has helped the government keep its word.

The Budget expects this good fortune to continue in the coming year as well.

With all new programmes announced and concessions given, the finance minister expects that she will have enough additional revenues in 2023-2024 that the proposed outlay of Rs 45 trillion (10 per cent higher than in the current year) and the proposed capital expenditure of over Rs 13 trillion (including loans given to states to meet their own capex) could be met with a reduced deficit of 5.9 per cent.

That would be sweet music to the fiscal consolidation hawks, who were dreading that the Budget would be a cornucopia of gifts to states which go to polls later in the year.

They were also worried that since this is effectively the last full-fledged Budget before the general election next year, the finance minister would be under pressure to sprinkle numerous freebies in the Budget.

She seems to have nicely sidestepped such temptations.

That leads to the Budget's optimism about the likely growth next year.

Various rating and financial agencies estimate that it will be between 5.8 per cent and 7 per cent.

The government expects it to be closer to the top end of the range.

Among the reasons it counts are India's stable and creditable performance in the current year, its skilful handling of the post-pandemic troubles, falling oil prices and a good handle on inflation.

The finance minister hopes that all these and the positive measures the country will continue to take in the current year will help India manage the global slowdown effectively and still emerge with a 6-plus percentage point growth next year, quite likely the highest such rate among large economies.

All of that sounded quite reassuring as she read out scheme after scheme for promoting inclusive, green growth in the future.

Some of the schemes, especially those in the inclusive growth segments, suspiciously sound like new versions with catchy new acronyms so dear to the ruling establishment (with the addition of p m to each, no less!) which were earlier drably named as tribal sub-plan or dryland development projects and so on.

There is a positive slant of environment conservation technology, with 'green hydrogen' mission being the star of the show.

Earlier Budgets, especially during Pranab Mukherjee's finance ministership, used to contain a plethora of schemes which would have token allocations ranging between Rs 100 crore and Rs 300 crore each.

The finance ministry bureaucrats, now wiser after all the ridicule such an approach evoked, have tried to bundle related schemes together with larger allocations, and wrapping them up in new acronyms.

Time alone will tell whether this improves the performance of the schemes.

But we never get to hear of what happened to these schemes once they pass into oblivion, nor do media hawks ever dig them up.

Will India remain resilient in midst of global turmoil

Although the finance minister listed various priority areas, it is evident that the Budget expects growth in the coming year from two principal engines already revving up rather smoothly: Consumer spending and capital expenditure.

Over the last several months, India has seen a grand resurgence of consumer spending, be it in the purchase of white goods and vehicles, vacations and travel and of, course, that mother lode of Big Fat Indian Weddings.

This is the reaction of a people who had to willy-nilly bottle up all their splurging, either because they had no money, or stringent pandemic control measures did not permit it.

Now that India believes Covid to be a thing of the past with numbers to prove it (Indian cases are in dribbles, whereas Europe, East Asia and even the United States are experiencing milder fresh recurrences of the dreaded scourge), its population is on a binge, in what is most appropriately called revenge consumerism.

Rising demand for consumer durables has prompted private capital investment.

The government is in overdrive with its infrastructure spending. The net result is a significant rise in capital expenditure.

We need to see the reduction in taxes and proposed capex targets in this light.

By itself, the Rs 35,000 tax cut may not be very large.

And while the capex at 4 per cent of the GDP is larger than ever before, its absolute value is also quite modest.

What this does, though, is create that invisible, consumer and business confidence.

It is not the stock market alone that moves according to the undefinable 'sentiment,' but the economy as whole does too.

The Budget oration of the finance minister and the confidence with which she delivered it, along with the measures and the recent upsurge in the economy (including reining in inflation considerably) would all contribute to unleashing the storied 'animal spirits' and help the economy run on the growth path quite smoothly. Or so the government hopes.

There is a lesson to learn though. What is important is not growth by itself, but its smoothening.

The kind of severe jolts that not just India but the whole world experienced in 2020-21 and 2021-22 caused severe dislocations in the lives of large segments of the population, some of which have not recovered fully even now.

Countries in our neighbourhood -- Sri Lanka, Pakistan, Nepal and even Bangladesh have all had to resort to emergency measures and seek help from other countries and international agencies.

So as important as economic growth is, economic resilience is even more important.

That is the ability to recover from shocks quickly and bounce back on to normal economic trajectories.

Professor Markus K Brunnermeiear of Princeton University reviewed the experience of various countries in dealing with the pandemic.

He says that resilience is not just whatever it takes, but 'having extra spending capacity in bad times, which requires the build-up of redundancies in good times. In other words, being frugal in good times is an essential part of resilience.'

What India did post-Covid was considered as too little by many, including this columnist, at that time.

But as the consensus builds up that the US stimulus was too large in economic terms (but unavoidable politically) and laid the foundation of the present inflation, our possibly blundering into a more modest one may have been a blessing in disguise as we combat our own inflation.

That lesson must temper all our present triumphalism about the magnificent recovery from Covid, fastest growing large economy in the world, the fifth largest economy in the world at present becoming a $30 trillion economy in 30 years.

It should most certainly influence our view of what the Santa Claus appearing in a red sari has served up.

Feature Presentation: Aslam Hunani/Rediff.com