Perception that government is giving them money is a big thing: Economist Bhanumurthy on the budget

Courtesy N R Bhanumurthy
02 February, 2019

The Narendra Modi-led government’s last budget before the upcoming Lok Sabha elections is aimed at appeasing struggling farmers and the middle class. On 1 February 2019, Piyush Goyal, the acting finance minister, presented the interim budget—conventionally, at the end of its term, a government presents a vote-on-account, or interim budget, to meet the expenditure till the conclusion of the elections. The budget’s major proposals include an assured income-support scheme for farmers, income-tax rebates for the middle class and a pension scheme for the unorganised sector.

The budget announced the Pradhan Mantri Kisan Samman Nidhi scheme, or PM-KISAN, under which owners of cultivable land of upto two hectares will receive Rs 6,000 every year through direct bank transfers. The scheme—budgeted at an annual expenditure of Rs 75,000 crore—will come into effect retrospectively from 1 December 2018 and is expected to reach twelve crore small and marginal farmers.

The budget also introduced a full tax rebate for middle-class taxpayers with an annual income of up to Rs 5 lakh. Goyal extended the National Democratic Alliance’s pitch to the middle class with an additional tax rebate on incomes of up to Rs 6.5 lakh, if the taxpayers “make investments in provident funds, specified savings, insurance etc.”

Post the budget, Tushar Dhara, a reporting fellow at The Caravan, spoke to NR Bhanumurthy, an economist at the National Institute of Public Finance and Policy in Delhi. Bhanumurthy analyses the government’s economic proposals ahead of the general elections, and its potential impact on the ballot. “The perception that this government is giving them money is itself a big thing,” Bhanumuthy said, “though many may not even know if they are eligible.”

Tushar Dhara: What are your initial reactions to the budget?
NR Bhanumurthy:I don’t think it’s a surprising budget. It’s focusing on the elections by trying to please two major segments of the economy, farmers and the middle class. The budget proposals will be received well by these segments. It is a populist, election-oriented budget.

TD: What do you make of the income-tax proposals?
NRB: If you look at the Finance Bill and the speech given by the finance minister Piyush Goyal, there is a disconnect on the income-tax exemption. It doesn’t appear in the Finance Bill. I think it’s been left for the next government. In the Finance Bill proposals, the tax slab for individuals with income between Rs 2.5 lakh to Rs 5 lakh, the tax rate is mentioned as5 percent. In the budget speech, it says individual taxpayers with a taxable annual income up to Rs 5 lakh will get a full tax rebate and therefore will not be required to pay any income tax. There is a discrepancy between the budget speech and the Finance Bill and it may be because this is an interim budget.

TD: So, when will the tax proposals kick in? And why do they find mention in the budget speech, but are absent in the Finance Bill?
NRB: If at all the income-tax rebates kick in, it will be on 1 April 2020. This is an interim budget and it should not contain any tax proposals. The reason it’s there in the speech is that it’s alerting the middle class that if we come back we will implement the tax cuts. If they come back they will clear it in the full budget in June, then it will become part of the Finance Bill, for the next year.

TD: What is your opinion about the farmer-income scheme?
NRB: I think the scheme will be very difficult to implement for the simple reason that it doesn’t differentiate between absentee and active landlords. The government will need land records to identify which farmers own upto two hectares of land, and it is the southern and western states that have better land records. It is well known that land records in the east and the north are pathetic. How is the government going to implement the scheme in places like Bihar, Uttar Pradesh, Madhya Pradesh, or even West Bengal? This is going to be a huge problem.

TD: How long do you think they will take to identify beneficiary farmers and start transferring money?
NRB: The problem of land records means that money can only be sent to farmers who are identified in the land records and who have bank accounts.

TD: How can the government translate the economics of the budget to politics?
NRB: The classic example is Telangana. The Rythu Bandhu scheme, which gives farmers Rs 4,000 per acre per season, enabled the Telangana Rashtra Samiti to come back with a thumping majority [in December last year]. It looks like the NDA government tried to take a leaf out of the TRS government’s playbook and the farmer-income scheme may be positive in terms of the political economy.

TD: Will implementing a direct income-support for farmers three months before the general elections pay dividends for the NDA government?
NRB: In the south and the west it should. I am not sure about the north and the east.

TD:But north India counts for a huge segment of votes, particularly Uttar Pradesh and Bihar?
NRB: But the way voters behave is also different, they go on perception. So the perception that this government is giving them money is itself a big thing, though many may not even know if they are eligible.

TD: Will the budget boost consumption, as some economists have said?
NRB: I am not sure, only Rs 20,000 crore has been budgeted for the direct income support for this fiscal. The remaining amount is for next fiscal, which will be transferred after the elections.Out of the Rs 20,000 crore, how much they actually manage to disburse will determine by how much consumption is boosted in the economy.

TD:How will the farmer-income scheme boost consumption?
NRB: The budget proposals are expected to increase disposable income of poor farmers in rural areas. In economics, there's something called marginal propensity to consume and this is higher in rural areas. That should lead to increase in the consumption of things like fast moving consumer goods, clothes, footwear. This increases the demand for these goods and in turn leads to a cascading impact on other commodities and goods.

TD: Does this budget address unemployment?
NRB: No. There are no major proposals in the budget which will expand economic activity. There’s not much on industries, while they talked a little about boosting the housing sector. It’s more to do with consumption.

TD: What about the the pension scheme for the unorganised sector—the Pradhan Mantri Shram-Yogi Maandhan—which will cover workers with a monthly income of up to Rs 15,000?
NRB: That’s a long-drawn process. You have to identify the beneficiaries and bring them into the pension network.The process will only start next year. The pension scheme is only for those who come out of the job market at the age of 60, which is a limited number of people.

TD: So which budget schemes can be implemented before the general elections?
NRB: Only the direct assistance to farmers, that too partially. There is confusion about the income-tax rebates.

This interview has been edited and condensed.